Free Reply to Response to Motion - District Court of Colorado - Colorado

Case 1:01-cv-02315-LTB-CBS

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO
Civil Action No. 01-cv-023 15-LTB-CBS

HARVEY SENDER et aI.,
Plaintiffs,
v.

WILLIAM JEFFREY MAN et aI.,
Defendants.

FREEBORN REPLY IN SUPPORT OF SUMMARY JUDGMENT
Plaintiff s Response offers no dispute as to all materials facts, including the fact that not
one Lifeblood noteholder ever met, spoke with or communicated in any way with any Freeborn

Defendant. The only fact in dispute is when Sabian and Poyfair learned for the first time that
Lifeblood had offered promissory notes. However, even then, Plaintiff does not offer evidence
that Messrs. Sabian and Poyfair knew of the Lifeblood notes prior to October 1998 such that they
should bear any liability. Instead, the sum total of

Plaintiff s "evidence" is that:

1. Mr. Sabian knew in 1997 that "people in Florida had been raising funds by selling
short-term promissory notes." Pltfs Resp. ("Resp."), pp. 2-3, ii 1, citing Exh. 1 at 76:10-77:2.
2. In 1997, a broker, not a noteholder, talked to Mr. Sabian about notes in general, but

not about Lifeblood notes. Resp., Exh. 4 at 83 :22-84: 15.
3. Mr. Poyfair signed a cover letter to an April 1998 invoice for one hour of an

associate's time researching North Carolina regulations on subpoenas. Id, Exh. 8. The subpoena

itself requests information and says nothing about any charges or illegal activity. Id
4. In August 1998, before Mr. Sabian knew anything about Lifeblood notes, Mr.

Sabian was consulted on possible work for Cardiac Care Corporation. Id, Exh. 2 at 133:9-17. Plaintiff offers not one additional fact showing that the Freeborn Defendants knew prior to

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October 1998 that Lifeblood was selling notes - not one witness; not one document. Without that

knowledge, there is nothing to tie these defendants to any scheme to defraud investors. Plaintiff
has no evidence proving the Freeborn Defendants knew not only that Lifeblood was selling notes,

but that it was perpetuating a fraud. There is no witness or document showing that the Freeborn

Defendants had knowledge, motive or opportnity to participate in a criminal enterprise.
Plaintiff s presentation of a mere scintilla of evidence is insuffcient to create a genuine issue of
fact. Herrzckv. Garvey, 298 F.3d 1184,1190 (10th Cir. 2002). Plaintiff

has failed to present facts

such that a reasonable jury could find in his favor. i Summary judgment should enter?

LEGAL ARGUMENT
Plaintiff does not dispute the Freeborn Defendants' recitation of the burden of proof and
elements applicable to each claim. Plaintiff failed to meet his burden of proving each element.

A. Plaintiff has not met his burden to establish standing.
Plaintiff has admitted that he is acting as a statutory trustee in the liquidation trust claims.

See Opening Brief, p. 6. Plaintiff cannot escape the explicit language in the Plan documents that
posits with the Liquidation Trustee the sole discretion and authority over both Trusts. See zd p. 7.
In that role, Plaintiff lacks standing to pursue the claims asserted in this case.
1. Plaintiff admits the Liauidation Trust claims are not property of the estate.

Relying primarily on this Court's previous decision in In re Porter McLeod, Plaintiff
asserts that his standing to pursue the Liquidation Trust claims derives from 11 U.S.C. § 544

which, he claims, authorizes a trustee to pursue any claims held by a judgment lien creditor -

i Plaintiff s other facts are either not supported by his record citations or are immateriaL.

2 According to Plaintiff s Response, the lynchpin of Plaintiff s case against the Freeborn Defendants is the $300,000 retainer. At best, Plaintiffs case boils down to one for fraudulent
transfer- and nothing more.

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including the tort claims asserted here. Plaintiff misapplies the Porter McLeod decision. In that
case, the Court held that because the parties did not dispute the alleged tort claims were "property

of the estate," the trustee had standing to assert those claims as a putative judgment creditor. 231

B.R. at 792. In Porter McLeod, there was no allegation that the debtor entities were "sham"
corporations. Here, in contrast, there is no dispute the Lifeblood Entities were "sham"
corporations. See, e.g., Resp., p. 9; Opening Brief ("Op. Br."), p. 8. Because "sham" corporations
have no cognizable claims of their own, the alleged tort claims are not "property of the estate" and
the Liquidation Trustee has nothing to pursue. See, e.g., Shearson Lehman Hutton, Inc. v.

Wagoner, 944 F.2d 114, 118-19 (2d Cir. 1991) (collecting cases).

Plaintiff admits that the Liquidation Trustee, in part, "seeks to redress ... injuries that are
common to individual creditors." Resp., p. 8. Such claims are clearly not "property of

the estate."

Feltman v. Prudential Bache Secs., 122 B.R. 466, 473-74 (S.D. Fla. 1990). Thus, only the

individual creditor can enforce the direct claims.
2. The Opt-In Trust claims. Plaintiff cannot overcome the Caplin factors.

Plaintiff does not overcome the restrictions of Caplin. The purported assignments to
Plaintiff do not confer upon him "property of the estate," but rather assign to him each individual's

claims. See Resp., Exh. 28, ii 1. Pursuant to the Opt-In Trust Agreement, each assignor expects to

receive a pro-rata share in any proceeds recovered. Id, ii 2; Resp., Exh. 27, pp. 8-9? Thus, the
same concerns at issue in Wiliams v. CaL. 1st Bank, 859 F.2d 664, 666-67 (9th Cir. 1988), namely

a trustee circumventing Bankruptcy Code restrictions by trying to recover property not belonging
to the estate, are at issue here.

With respect to the second Caplin factor, Plaintiff argues that in pari delicto will not apply

3 In re Bogdan, 414 F.3d 507, 511-12 (4th Cir. 2005), cited in Pltfs Resp. at p. 10, is inapposite
here, because the assignors in that case had relinquished all rights to any direct recovery.

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because of an "adverse interest" exception. However, that exception does not apply where, like

here, the corporate entities were mere instrumentalities of the bad actor. Vail Nat'l Bank v.
Finkelman, 800 P.2d 1342, 1345 (Colo. App. 1990). It is undisputed that the Lifeblood Entities

acted only through Jeffrey Mann.

As to the likelihood of inconsistent results, Plaintiff makes the nonsensical point that
"noteholder suits . . . against Lifeblood Entities have no bearing on Plaintiff s claims against the
Freeborn Defendants." Resp., p. 12. Clearly, any recovery of damages by any individual

noteholder, be it in a suit against Mann individually or a Lifeblood Entity, has a bearing on that
noteholder's right to recover against the Freeborn Defendants. Each noteholder is entitled to only

one recovery. The undisputed facts show some individuals who executed assignments have fied
suit and already recovered. Op. Br., p. 8. The Caplin court's fears are reality.

Finally, despite Plaintiff s statement to the contrary, the Freeborn Defendants clearly
dispute the effectiveness of each assignor's purported assignment of claims to the Opt-In Trustee.

See Op. Br., pp. 8-9. Plaintiff offers no response to the individual states' laws that do not permit

the assignment of claims for conspiracy, breach of fiduciary duty and fraud. Because individual

states' public policies forbid assignment of individual tort claims, i.e. "personal" claims that

belong to individuals, these states' public policies outweigh any interest of Colorado. At
minimum, Plaintiff fails to prove that he has standing for each individual's claims.

B. Plaintiff has failed to show that an aiding and abetting fraud claim is cognizable.
Like the Freeborn Defendants, Plaintiff has been unable to find any Colorado appellate
authority recognizing an aiding and abetting fraud claim. Resp., p. 15.4 This Court should decline
to create a new cause of action that the Colorado courts have not approved.

4 Plaintiff relies on Porter McLeod and Holmes v. Young, two cases that discuss only an aiding and

abetting breach of fiduciary duty claim not aiding and abetting fraud, and Nat'l Union Fire Ins. Co. of Pittsburgh, P A. v. Kozeny, a case this Court is certainly familiar with, which describes a
(Footnote contd on next page)

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C. Plaintiff has no evidence to support the elements of his aiding and abetting claims.

1. Plaintiff has no evidence of knowin2 participation.

Plaintiff argues that the Court should impose aiding and abetting liability where Plaintiff
alleges, at most, a general awareness by the Freeborn Defendants that Lifeblood was selling notes.

This Court, however, has already held that anything less than actual knowledge is insuffcient.
Stat-Tech Liquidating Trust v. Fenster, 981 F. Supp. 1325, 1339 (D. Colo. 1997). Moreover, even
if

the Freeborn Defendants knew before October 1998 that the notes existed (they did not), there is

nothing untoward about borrowing money by issuing notes. Knowledge of the notes' existence
hardly equates to knowing participation in a Ponzi scheme.
2. Plaintiff has no evidence of substantial assistance.

Plaintiff does not dispute that this element must be strictly construed where attorneys are
involved. Instead, he argues that by (1) disbursing $127,965 in funds from the firm's trust account

for Mann's personal benefit; and (2) using some of the retainer to pay legal fees, the Freeborn

Defendants "substantially assisted" Mann. Plaintiff s allegations, even if true, would not
constitute "substantial assistance." Op. Br. at 12-13. "Substantial assistance" is a large amount

of assistance. Plaintiffs expert acknowledges that $69,003 is the total amount Freeborn & Peters
was paid. In the context of a $9.3 million fraud scheme and a $77 million damages claim, $69,003
in legal services and $ 127,965 in transfers cannot be characterized as substantiaL.

As numerous courts have recognized, aiding and abetting liability cannot be premised on

the fact that legal services were rendered. Rather, the plaintiff must produce evidence that the
lawyers knew of

the fraud and had reason to participate. Barker v. Henderson, Franklin, Starnes

(Footnote contdfrom previous page.)

defendant's use of a corporate entity to "aid" in the commission of fraud, but the corporate entity was not a party to the litigation. Thus, there was no claim for aiding and abetting fraud.

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& Holt, 797 F.2d 490, 496-97 (7th Cir. 1986). Here, the Freeborn Defendants received no

compensation from the note sales, nor did they receive fees for rendering advice regarding the

notes. The $69,003 that was billed represented such an insubstantial amount of revenue for
Freeborn & Peters, a large national firm with 125 lawyers, that "it is inconceivable that they joined

a venture to feather their nests by defrauding investors." Id The Freeborn Defendants had
nothing to gain and everything to lose by participating in a Ponzi scheme. Indeed, Plaintiff sown
expert concedes that they did not act with the requisite intent.
3. Plaintiff has no evidence of dama2es caused bv alle2ed aidin2 and abettin2.

Plaintiff does not dispute that no damages were caused by the alleged aiding and abetting.
D. Plaintiff has no clear and convincing evidence of a COCCA violation.
1. There is no evidence of participation in the conduct of an enterprise.
Plaintiff fails to address the fact that, if the enterprise is Lifeblood, the Freeborn

Defendants did not participate in the conduct of the enterprise. Instead, Plaintiff suggests that the

enterprise is not Lifeblood, but the law firm itself. Resp., p. 18. This contention precludes any
liability under COCCA § 18-17-104(3), as the enterprise and the defendant cannot be the same
entity for purposes of that section of

COCCA. Ferris v. Bakery, Confectionery & Tobacco Union,
Okla., 153

Local

26, 867 P.2d 38,46 (Colo. App. 1993); Brannon v. Boatmen's First Nat. Bank of

F.3d 1144, 1146 (10th Cir. 1998) (RICO).

Moreover, Plaintiff s contention that the law firm is the "enterprise" necessarily limits
liability under§ 18-17-104(1)(a) to $69,003, the amount allegedly received and used by the firm
as proceeds of

racketeering. Colo. Rev. Stat. § 18-17-104(1)(a). See also Grider v. Texas Oil &

Gas Corp., 868 F.2d 1147, 1150-51 (10th Cir. 1989) (plaintiffs damages must flow from use of
racketeering income); Nolen v. Nucentrix Broadband Networks Inc., 293 F.3d 926, 929 (5th Cir.

2002) (same). Given the only "racketeering income" arguably used or invested by the Freeborn

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Defendants was $69,003, the Freeborn Defendants are entitled to partial summary adjudication

limiting COCCA damages to $69,003. Fed. R. Civ. P. 56(d).
2. Plaintiff has no clear and convincin2 evidence of intent.

Plaintiff nowhere disputes that one cannot negligently commit a COCCA violation. The

only evidence submitted to show intent are legal services that were completely proper. This is
hardly clear and convincing evidence of criminal intent.
3. Plaintiff has no evidence of a "pattern" of racketeerin2 activity.

Plaintiff tries to have it both ways. First, because Plaintiff cannot show that the Freeborn
Defendants participated in the conduct of Lifeblood, he argues that the law firm is the enterprise.
Then, in a complete about-face, Plaintiff argues that the Freeborn Defendants engaged in a pattern

of racketeering activity to perpetuate Lifeblood's activities. The fact that the Freeborn Defendants

did not participate in the conduct of Lifeblood is, however, fatal to Plaintiff s COCCA
§ 18-17-104(3) claim. See People v. Chaussee, 880 P.2d 749, 758 n. 12 (Colo. 1994).

In addition, the facts simply do not support a COCCA claim. Plaintiff does not dispute
that each defendant must have agreed to commit, or in fact have committed, two or more

specified predicate crimes as part of his participation in the enterprise. The only "acts" Plaintiff
points to, i.e., transferring funds from a trust account at a client's direction, drafting scripts for the
purpose of disseminating consistent information, and, later, referring the principal of the company
to a criminal lawyer, are not crimes. Moreover, Plaintiff has no evidence to contravene the

conclusion reached by the criminal authorities, namely, that the scheme ended on October 13,
1998 (Wells) and September 30, 1998 (Mann). As a result, any acts that occurred after October
13, 1998 could not constitute a predicate act that occurred during the pendency of the scheme.
4. No noteholders were dama2ed by any alle2ed predicate acts.

As discussed in section E(l) infra, to the extent that Plaintiff could establish a claim under

COCCA, his damages would be limited to $69,003. Plaintiff cannot, however, recover even this

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amount, as he has failed to establish the requisite causal connection between use or investment of

the $69,003 in income received by Freeborn & Peters and the damages alleged, namely, the
noteholders' investments in the promissory notes. Brooks v. Bank of Boulder, 891 F. Supp. 1469
(D. Colo. 1995). Although Freeborn & Peters used retainer funds in the operation of

the firm, that

is insuffcient to establish liability. Vicom, Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771, 779
n.6 (7th Cir. 1994). Because all of

the investors purchased their notes before the alleged predicate

acts occurred, Plaintiff has failed to show that any injury resulted from each predicate act. Floyd

v. Coors Brewing Co., 952 P.2d 797, 803 (Colo. App. 1997), rev'd on other grounds, 978 P.2d
663 (Colo. 1999).

Plaintiff attempts an end-run around his inability to show a causal connection by
suggesting that, pursuant to § 18-17-104(4), the Freeborn Defendants are liable for all damages
resulting from a conspiracy. To prevail on a COCCA conspiracy claim, however, Plaintiff first

must establish that there was an agreement to a pattern of racketeering activity and an agreement
to the statutorily proscribed conduct. Brooks, 891 F. Supp. at 1479. "Mere association with

conspirators, even with knowledge of their involvement in a crime, is insuffcient to prove

participation in a conspiracy." Id. There is no evidence of any agreement by the Freeborn
Defendants to assist in the commission of crimes.
E. Plaintiff has no evidence that the Freeborn Defendants participated in a conspiracy.

Plaintiff does not dispute that, to the extent Mann was acting in his capacity as an offcer

of Lifeblood, the Freeborn Defendants could not have conspired as a matter of law. Instead,
Plaintiff asserts that the Freeborn Defendants conspired to make personal payments to Mann from
the $300,000 retainer. Plaintiff, however, points to no evidence of a meeting of

the minds. The

courts will not infer the agreement necessary to form a conspiracy; evidence of such an agreement

must be presented by the plaintiff. Nelson v. Elway, 908 P.2d 102, 106 (Colo. 1995). Moreover, a
party may not be held liable for civil conspiracy for doing in a proper manner that which it had a

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lawful right to do. Id. The only "evidence" Plaintiff can even attempt to point to are the

legitimate legal services that the Freeborn Defendants provided to Lifeblood. This, however, is
not enough.
F. Plaintiff has no evidence that the Freeborn Defendants breached any duty.

Expert testimony is necessary to establish the standards of professional conduct. Kelton v.

Ramsey, 961 P.2d 569, 571 (Colo. App. 1998). Plaintiff has failed, however, to point to any
expert standard of care testimony. And, the evidence shows that no duty was breached. Mann

directed transfers of trust fund money as the representative of Lifeblood, and the Freeborn
Defendants were not only unaware of any improper reason for the transfers but had a legal and
ethical obligation to disburse unearned advanced fees on the client's request. In addition, Plaintiff
has produced no evidence establishing a causal relationship between the Freeborn Defendants'

conduct and the millions of dollars in damages he seeks. Importantly, Plaintiff s entire "damages"
argument is that the trust fund money could have been used to repay creditors. Under this

argument, the only injury that could have been caused by the alleged conduct is $300,000 - the

total of all amounts either transmitted to the Freeborn Defendants or disbursed by them at their
client's direction. At a minimum, then, partial summary adjudication should be entered that the
maximum damages Plaintiff can recover is $300,000. Fed. R. Civ. P. 56(d).

G. Plaintiff has not proven any entitlement to punitive damages.
Plaintiff contends the Freeborn & Peters trust account was used to launder the $300,000

retainer. Plaintiff has produced no evidence, let alone evidence showing beyond a reasonable
doubt, that the Freeborn Defendants received or distributed the funds to perpetrate a fraud.
H. Plaintifls statute of limitations argument contradicts his standing argument.

Plaintiff relies on Bankruptcy Code sections when they suit his purposes and disregards
them when they do not. For standing purposes, Plaintiff disclaims that the Liquidation Trust

claims are brought pursuant to § 541 because those claims are barred by the doctrine of in pari

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delicto . Yet, for statute of limitations purposes, Plaintiff invokes § 1 08( a)' s extension, even

though this section applies only to nonbankruptcy pre-petition causes of action belonging to the

debtor. See In re Downtown Inv. Club III, 89 RR. 59, 65 (RAP. 9th Cir. 1988); In re Dry Wall
Supply, Inc., ILL RR. 933, 935 n.2 (D. Colo. 1990). Plaintiff cannot have it both ways. He either

asserts claims belonging to the debtor or not. If the former, Plaintiff lacks standing as a matter of
law. If

the latter, § 108(a) does not save Plaintiffs claims from being time-barred.

I. The Opt-In Trust claims are not timely.

The Opt-In Trust claims are not saved by invoking equitable tolling or the discovery rule.

Neither of those principles applies because the noteholders' awareness of the fraud triggers the
statutory time period. Grogan v. Taylor, 877 P.2d 1374, 1379 (Colo. App. 1993), rev'd on other
grounds, 900 P.2d 60 (Colo. 1995). See also Yoder v. Honeywell Inc., 900 F. Supp. 240, 247 (D.

Colo. 1995), aff'd, 104 F.3d 1215 (10th Cir. 1997). There is no dispute the noteholders' knew by
November, 1998 they were injured by someone.
Dated this 8th day of

February, 2006.

sf Julie M. Walker

Julie M. Walker Wheeler Trigg Kennedy LLP 1801 California Street, Suite 3600 Denver, CO 80202
Telephone: (303) 244-1800

Fax: (303) 244-1879
E-mail: walker~wtklaw.com

A TTORNEYS FOR DEFENDANTS

FREEBORN & PETERS LLP, MICHAEL SABlAN, DARWIN J. POYFAIR

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CERTIFICATE OF SERVICE (CM/ECF)
I hereby certify that on February 8, 2006, I electronically fied the foregoing FREEBORN DEFENDANTS' REPLY IN SUPPORT OF SUMMARY JUDGMENT with the Clerk of
Court using the CM/CF system which will send notification of such fiing to the following e-mail addresses:
. Ann H. Cisneros

acisneros(£lindquist. com stoms(£lindquist. com
. Herbert Anthony Delap

cdelap(£duffordbrown. com ccarlson(£duffordbrown. com
. Carolyn J. Fairless

fairless(£wtklaw.com hart(£wtklaw.com
. David W. Furgason

dfurgason(£duffordbrown. com ccarlson(£duffordbrown. com
. James R. Leone j rleoneattorney(£yahoo. com
. Michael L. O'Donnell

odonnell(£wtklaw. com pointer(£wtklaw. com
. John C. Smiley

j smiley(£lindquist. com stoms(£lindquist. com
. Julie M. Walker

walker(£wtklaw. com mcguire(£wtklaw. com

and deposited a true and correct copy in the United States Mail to the following non CM/CF participant:
W. Jeffrey Mann 419 Abbeyridge Court Ocoee, FL 34761
sf Julie M. Walker by Deborah McGuire Julie M. Walker Wheeler Trigg Kennedy LLP 1801 California Street, Suite 3600 Denver, CO 80202
Telephone: (303) 244-1800

Fax: (303) 244-1879
E-mail: walker~wtklaw.com

405752v3

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