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Zultys Auction Set by Bankruptcy Judge for Monday
[October 20, 2006]

Zultys Auction Set by Bankruptcy Judge for Monday


TMCnet Executive Editor
 

A federal bankruptcy court judge plans to hold a hearing on Monday to auction off the assets of embattled VoIP supplier Zultys Technologies (News - Alert) to the highest bidder, TMCnet has learned.



 

According to court documents obtained by TMCnet, the hearing will be held on October 23 in U.S. Bankruptcy Court, Northern District of California, in San Jose, before Judge Arthur S. Weissbrodt, who will consider two motions to auction off the company and allow lease and other agreements to be assigned to the highest bidder.


 

The motions were filed by Zultys President and Founder Iain Milnes, who is fighting to keep control of the struggling telecom equipment vendor that collapsed last summer. But while Milnes has a good chance of succeeding, legal experts tell TMCnet that obstacles could still stand in his way.

 

“He is trying to take advantage of the bankruptcy law, which enables you to expedite the sales process,” said Jonathan Pasternak, a partner at Harrison, NY-based Rattet, Pasternak & Gordon Oliver. Under Section 363 (f) of the Bankruptcy Code, petitioners can seek the sale of assets “free and clear of liens and encumbrances.”

 

By doing so, Milnes would be able to reorganize Zultys and better manage its obligations, which include $2.75 million of back wages and more than $41.8 million of unsecured creditor claims. But, that said, he certainly wouldn’t be relieved of all claims – for example, any related to fraud or other circumstances, Pasternak explained.

 

The legal wrangling is the latest chapter in the saga of Zultys, which at the height of its success abruptly shuttered its doors last summer, fired most of its employees and left much of its reseller community in disarray amid a lack of funding. In the end, the company filed for Chapter 11 bankruptcy protection on September 8. At the time of the filing, Zultys had more than $45 million of liabilities on its balance sheet and assets of only $1.8 million.

 

During a brief telephone interview, Milnes confirmed that auction is schedule to take place on Monday but declined to further comment at the risk of “tipping my hand” in his proverbial high-stakes poker match. To that end, Milnes may be shrewdly assessing the competitive landscape for at least two other groups have emerged as interested parties in the auction process.

 

Telrad Connegy, an Israeli-based telecom equipment vendor, has recruited a core set of former engineers (including Vladimir Movshovich, the former vice president of technology) to its wholly owned subsidiary Pivot and plans to bid on Zultys. Word purportedly comes from Ben Leznik, former Sofware Director at Zultys, via a posting this week, on TMCnet Publisher Rich Tehrani’s well-read VoIP Blog.

 

Todd Browning, who heads up Telrad Connegy’s U.S. operations, declined to comment on the rumors.

 

In addition, InPath Devices has emerged as an interested party after the distributor’s management, Matt Ferro and Michael Yee, appeared in court earlier this month, according to the case docket. “I am interested party,” Ferro told TMCnet. “We are a Zultys reseller or at least we have been. I don't know that anybody really is anymore.”

 

Ferro declined to provide details of the bidding process.

 

But Milnes may also be tripped up by the legal maneuverings of its creditors and other former employees. As is customary in bankruptcy cases, the creditors have formed a committee, which is now represented by John Murray, partner at Murray & Murray, to stake their claims. In addition, Bay Area bankruptcy lawyer Wayne Silver has filed a brief on behalf of a group of former employees in opposition to the auction.

 

“They do not have the right to block the sale,” Pasternak said. But, based on his professional opinion, the auction process could still be complicated.

 

“It may not be approved…it may be adjourned,” the lawyer observed as a third-party bystander.

 

Murray has repeatedly declined requests for interviews. Silver and Michael Malter, partner at Binder & Malter representing the petitioner, have also declined to comment.

 

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Robert Liu is Executive Editor at TMCnet. Previously, he was Executive Editor at Jupitermedia and has also written for CNN, A&E, Dow Jones and Bloomberg. For more articles, please visit Robert Liu's columnist page.


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