Free Brief in Support of Motion - District Court of Colorado - Colorado

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

Document 500

Filed 12/29/2005

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO
Civil Action No. 01-cv- O2315- LTB- CBS
HARVEY SENDER et aI.

Plaintiffs
MANN et aI.

WILLIAM

JEFFREY

Defendants.

FREEBORN DEFENDANTS' RE- FILED SUMMARY JUDGMENT BRIEF

This case arises out of the bankruptcy

of four

entities (the " Lifeblood Entities

) that

bankruptcy trustee Plaintiff Harvey Sender alleges were operated by defendants Mann and Wells
as vehicles for an illegal Ponzi scheme involving the sale of promissory notes. l
Despite years of

investigation , Plaintiff has failed to adduce any evidence showing that the Freeborn Defendants

acted other than appropriately.

Nevertheless , Plaintiff continues to claim that the Freeborn

Defendants participated in Mann and Wells ' fraudulent scheme.
Freeborn & Peters is a 125- lawyer , Chicago- based firm. During relevant times , Freeborn

& Peters had a Denver office where Poyfair and Sabian worked , respectively, as a partner and of
counsel. Mr. Sabian

is a transactional business and securities attorney who has practiced law for

36 years. Mr. Poyfair is a litigator experienced in complex business litigation. These are the

individuals and law firm who Plaintiff alleges conspired with Mann and Wells in a criminal
Ponzi scheme. Although certain Lifeblood Entities were clients of the Freeborn Defendants , an

1 Both Mann and Wells pled guilty to criminal charges related to the Lifeblood Ponzi scheme and have
completed their jail sentences.

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attorney- client

relationship is a far cry

from a conspiracy.

The Freeborn Defendants ' legal

services primarily involved the creation of LLPs which were completely separate from the
promissory notes - the sole basis of Plaintiff s alleged damages. Lifeblood' s formation , and the

preparation of legal opinions regarding the notes , were done by other lawyers.
Defendants had no

The Freeborn

involvement in issuing the notes , and their acts had no causal connection to

Plaintiff s alleged damages. On the contrary, as soon as the Freeborn Defendants learned of the
possible crime , they advised their client to turn itself in , and assisted in putting the company into

bankruptcy for the benefit of the creditors. These actions should be applauded - not vilified.
S T A TEMENT OF

UNDISPUTED MATERIAL FACTS
(Sabian Dep.

In 1997 ,

certain Lifeblood Entities retained Sabian to form LLPs. 2

Ex. A-

, at 11 :23- 12:9; 18:7- 19:7 , 69: 17- 70: 17 ,

78:24- 79:4. ) While some LLP interests were

sold , the investments were returned. Plaintiff is not claiming any damages related to the LLPs.

In early October 1998 , Lifeblood asked Poyfair to assist it in anticipated investor

and regulatory litigation. Poyfair made arrangements to visit Lifeblood' s Florida offices to
compile documents. (Poyfair Dep. , Ex. A- , at 37:15- 41:21; Mann Dep. , Ex. A- , at 393:4- 14.
On October 14 ,

1998 , Sabian and Poyfair learned that Mann had been indicted for

his role in Legend Sports , an unrelated company that had issued promissory notes. (Ex. A- 3 at
392:20- 393 :3; Ex. A- I
at 101: 1-

23; Ex. A- 2

at 93 :9-

, 116: 18-

236:2- 15.

On October 19 , 1998 ,

Poyfair made his planned Florida trip, marked documents
(Ex. A- 2 at 45: 11-

for copying, and asked that the copies be shipped to Denver for review.

2 It is uncontroverted that Sabian was not told at the time that Lifeblood had issued notes. (Sabian Dep.
Ex. A- I at 104:15- 105:4; Wells Dep. , Ex. A- 4 at 461:18- 463:2; Ex. A- 22 at RFA 39- 41.)

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54:8-

71:14- 20. ) At that time , Poyfair and Sabian did not know that Lifeblood had issued
, 80:7- 12; Ex. A- 3 at 404: 15- 405:7.

promissory notes. (Ex. A- 2 at 77: 11-

Poyfair did no work for Lifeblood prior to October 1998 , which was the first time

he heard of the concept of promissory notes. (Ex. A- 2 at 41:20- 42:21;
not learn of the notes until about October 20 , 1998. (Ex. A- I

127:15- 22. ) Sabian did

at 104:15- 105:4. )

No noteholder

ever met , spoke with , or relied upon the Freeborn Defendants in purchasing or renewing notes.

After the Florida trip, Poyfair left for a planned
91:21- 92:3;
123:14- 23; 133:22- 134:11; 186:5- 187:1;

10- day vacation. (Ex. A- 2

at

Ex. A- 5 (reflecting Nov. 6- 16 absence).

Upon his return , Poyfair began investigating Lifeblood in order to prepare its response to any
litigation or regulatory inquiries. (Id.)

Poyfair s belief, and the only information known to him

was that the notes were guaranteed by bonds leaving an avenue for recovery for the noteholders
in the event of Lifeblood' s default. (Ex. A- 2 at 172:2- 12; Ex. A- 3 at 400:6- 401:
12.

In early November , Poyfair assisted Lifeblood in preparing a scripted response to
inquiries regarding the notes to ensure that accurate and consistent information was being
disseminated. (Ex. A- 2 at 168:9- 24;

Ex. A- 3

at 396:23- 397:11.) At the time , Sabian was

assisting Lifeblood in negotiations with a publicly-traded company, Juniper Group, for the sale

of certain assets to Juniper in a transaction Mann hoped would resolve Lifeblood' s cash flow
problems. (Ex. A- 3 at 401:13- 403:15; Ex. A- I
111:12- 112:3;
113:7- 20; 120:16- 124:11;
at 119:23- 120:25;

Hreljanovic Dep. , Ex. A- , at

PI. Dep. Exs. 112

and 495 ,

attached as Ex. A-

Hreljanovic Dep. Exs. 2 and 8-

, portions attached as Ex. A-

At the time the script was prepared , the Freeborn Defendants believed it to be
accurate. (Ex. A- 2
at 168:9- 24. )

Moreover , the principals of Lifeblood had not given the

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Freeborn Defendants any reason to think the script was inaccurate. (Ex. A- 3 at 400:6- 403:
As Poyfair s investigation progressed into mid-November 1998 ,

15.

he began to

question whether Mann and Wells were being honest with him. (Ex. A- 2

at 188: 14- 23. ) Poyfair

asked Wells about the bonding companies and received a cryptic response to " ask Jeff...
100:13- 22. )
10.
Poyfair prepared to
conduct a detailed interview of Mann. (Id

(Id.

at 93:4-

At the November 24 ,

1998 interview ,

Poyfair asked Mann why they didn t just
bonds. (Id

sue the insurance companies that had defaulted on the

at 96:10- 97:19; Ex. A- 3 at

395:5- 11.) Mann then disclosed to the Freeborn Defendants , for the first time , that the bonding

companies were fake. (Ex. A- 2 at 96:10- 97:19; Ex. A- 3 at 394:12- 24.
11.

Poyfair immediately advised Mann of possible criminal implications of that

conduct and that Mann and the company should retain criminal counsel. He referred them to
Robert Merkle , a former US. Attorney, who thereafter assisted Lifeblood with the negotiations

with authorities. (Ex. A- 2
12.

at 96: 10- 97:

19 , 100:23- 101:3; Ex. A- 3 at 395:25- 396:

12.

The Freeborn Defendants researched their ethical obligations and determined that

unless Mann turned himself in , they would withdraw from representing Lifeblood. (Ex. A- 2 at
103:21- 105:14. )
After

Mann promptly turned himself in , Poyfair assisting Lifeblood in filing
noteholders. (Id.

bankruptcy in order to recover as much money as possible for the

at 28:6-

29:15 198:20- 199:18; Ex. A- 3 at 375:12- 379:5; Royal Dep. , Ex. A- , at 37:15- 38:1.)
13.
Based on

standard hourly rates , the Freeborn Defendants were paid a total
, at 10 , Fig. 6.

$69 003 in fees and costs for work on behalf of the Lifeblood Entities. (Ex. A14.

The noteholders stopped receiving interest payments

in mid 1998 ,

and started
(questioning

questioning the validity of the bonding companies by October 1998.

Eg.,

Ex. A- II

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master guarantee); Ex. A- 12 (six different selling agents had requested copies of the bonds).
15.

In February 1999 , the noteholders were informed of a criminal investigation into
at 77: 19- 80:

Lifeblood' s activities. (Ex. A- 9

10; Ex. A-

, at p. 17. )

By early 1999 ,

noteholders

had brought claims against Lifeblood and others for breach of contract , fraud and breach of
fiduciary duty based on unpaid notes. (See

Summary attached as Ex. A- 14.

16.

By September 1 ,

1999 , several brokers retained an attorney to investigate claims

against Lifeblood , and notified noteholders that the State of Florida had convicted Mann of

fraud. (Ex. A- 13 at p. 61.) By November 10 , 1999 , the noteholders were notified of a State of
Florida Complaint against Lifeblood , Mann and Wells , alleging a Ponzi scheme.
(Id.

at p. 78- 80.

II.

STANDARD OF REVIEW

Since the Freeborn Defendants do not bear the burden of persuasion at trial , they do not
need to negate Plaintiff s claims , but need only point out a lack of evidence on essential elements
of those claims. Adler v.

Wal-Mart Stores, Inc. 144 F. 3d 664 670- 71 (10th Cir. 1998). Plaintiff

cannot , in response to this motion , rest on allegations. He must go beyond the pleadings and set
forth specific admissible facts

contained in affidavits ,

deposition transcripts , or deposition

exhibits from which a rational trier of fact could find for him.

Id

at 671. Plaintiff cannot do so.

III.

ARGUMENT

Plaintiff Bears the Burden To Establish Standing, and Cannot Do So.
Like any party attempting to invoke federal jurisdiction , a bankruptcy trustee bears the

burden of establishing standing through the " triad of injury in fact , causation , and redressability.
Steel Co. v.

Citizens for

a Better Env

523 U S. 83 ,

103- 04

(1998) (fn omitted);

In re Porter

McCleod, Inc.

231 B.R. 786 ,

791 (D. Colo. 1999). At the summary judgment stage Plaintiff

must establish there exists no genuine issue of material fact as to justiciability, by presenting

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specific evidentiary facts.

Dep

tofCommerce

v.

Us. House of Rep. 525 US. 316 , 329 (1999);

Gilbert

v.

Shalala 45 F. 3d

1391 ,

1394 (10th Cir. 1995). Plaintiff cannot meet this burden.

Plaintiff Lacks Standin2 To Assert The LiQuidation Trust Claims Because Sham Corporations " Can Have No Claims.
Plaintiff asserts the Liquidation Trust's claims under sections 541 and 544 of the
Bankruptcy Code. (Sender Dep. , Ex. A- 15 at 120:16- 18). The Code makes plain , however , that
the trustee
s powers are

limited to the actual or potential property of the bankruptcy estate. In
1335 ,
1338 (lIth Cir. 1999); Sender v.

re Halabi 184 F. 3d

Simon 84 F. 3d 1299 , 1304- 05 (10th

Cir. 1996). To have standing to assert the Liquidation Claims , Plaintiff must show injury to the
Lifeblood Entities - injury that would result in the Liquidation Claims having accrued to the
debtor corporations as " property of the estate.

" If the Lifeblood Entities suffered no injury,
Hirsch v.

however , they would have no claims and neither would Plaintiff as trustee.
Andersen

Arthur

Co. 72 F. 3d 1085 , 1093- 94 (2d Cir. 1995) (trustee lacked standing to pursue claims

predicated on misleading statements to

investors where claims and resulting injury belonged
v.

solely to the investors);

Shearson Lehman Hutton , Inc.
Sender v. Kidder Peabody

Wagoner

944 F.2d 114 ,

118 (2d Cir.

1991) (collecting cases);

Co. 952 P.2d 779 , 782 (Colo. App. 1997)

Sender. . . cannot show an injury

to a legally protected right" and therefore lacked standing).

Plaintiff s contention

that the Lifeblood

Entities were merely " sham

corporations

demonstrates that his attempt to invoke standing is groundless. (Cmplt. ~~ 29 , 30, 32 , 33 , 46 , 64;
Seawell Rept. ,

Ex. A-

, pp. 2- 3 (" (Lifeblood) had no legitimate business activities
and " no

company

never had any business operations "

significant business operations

) Without any

legitimate business operation , the Lifeblood Entities could not suffer a cognizable injury from

which claims could

accrue.

Feltman

v.

Prudential Bache Sec.

122 B.R. 466 , 474 (S. D.

Fla.

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

1990) (where everything principal stole from debtor corporations , debtors had stolen from their
creditors

any alleged injury to the debtors is as illusory as was their corporate identity

Under

Feltman Plaintiff lacks standing to use these illegitimate businesses as a vehicle for prosecuting
claims that belong to the individual creditors.
Plaintiff Lacks

Standin2 To Pursue The Opt-

In Claims Under

Caplin.

Plaintiff admits that the Liquidation Trustee is acting pursuant to , and is therefore limited

by, the Bankruptcy Code. Ex. A- 15

at 120: 16- 18. As Liquidation Trustee

, Plaintiff controls not

only the claims asserted by the Liquidation Trust , he also controls the claims asserted by the Opt-

In Trust , claims referred to in the Plan as " Individual
and at Annex , Ex. B ,
Liquidation Trust.

Claims. " Ex. A- 17

at Annex , p. 9 , 96. 8(a)
tied to the

p. 6 , 9 4.

11. The purpose of the Opt- In
Because

Trust is directly

p. 3 , 9 2. 3.

it is the Liquidation Trustee who " in his sole and

absolute discretion"

controls all of the claims asserted in

this case and who admittedly is

restricted by the provisions of the Bankruptcy Code , Plaintiff s standing overall is restricted by

the provisions of the Bankruptcy Code - whether applied to the Liquidation Trust claims or the
Opt- In Trust claims.
Cf Williams v.

Cal. 1st Bank 859 F.2d 664 666- 67

(9th Cir. 1988).

The trustee lacks standing, however , to bring personal claims of creditors against third
parties because personal claims are not property of the estate. Caplin v.

Marine Midland Grace

Trust Co.

406 US. 416 ,

434 (1972) (three factors to consider are: whether money owed to the
risk of inconsistent results); Simon at 1305; In re M

estate; impact of

in pari delicto;

L Bus.

Mach. Co.

136 B.R. 271 , 273- 77 (Bankr. D. Colo. 1992),
Caplin

aff'

160 B.R. 850 (D. Colo. 1993).

As to the first

factor , the Opt- In Claims do not seek property of the estate. Claims

based on breaches of duty and

misrepresentations made directly to investors are individual
See M

creditor claims and not derivative claims seeking redress for injury to the corporation.

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at 276;

Hirsch

at 1094;

Begier

v.

Price Waterhouse 81 B.R. 303 ,

305- 06

(E.D. Pa. 1987)

(trustee lacked standing to assert individual claims under 9 544 because claims required proof of

reliance as to each creditor). The same
B.R. 96 ,

holds true for the COCCA claim.

See In re Hunt 149

103 (Bankr. N. D. Tex. 1992). By agreeing to limit fraud damages to certain testifying
see

investors

Dec. 2 ,

2004 Order , Plaintiff has admitted that the Opt- In Claims require proof of

facts individual to each noteholder.
As to the second Caplin

factor, it is undisputed that Mann s and Wells ' misconduct will
Entities.

be imputed to the Lifeblood

Vail Nat' l Bank
in pari delicto

v.

Finkelman

800 P.2d 1342 , 1344-

(Colo. App. 1990). Plaintiff therefore stands
barred from recovering on the entities ' claims.
3d 94 ,

with these corporate insiders and is

See , e. g., In re Bennett Funding Group, Inc. 336

100- 02 (2d Cir. 2003);

In re Hunt

at 103. Plaintiff acknowledges that the
12).

in pari delicto

doctrine applies. (Ex. A- 15
As to the third Caplin

at 128: 16- 129:

factor , there is a high risk of inconsistency between individual

actions and the results here. Eleven noteholders have filed their own actions (Ex. A- 14), with at

least two of them recovering some
18:16- 18;
75:3- 23). In addition ,

amount.

(Id Tab 11; Tyre Dep. , Ex. A- 18

at 16:20- 17:6

individual lawsuits have been filed by noteholders who also
concerns about duplicative
attempt to use the Opt-

assigned their claims to the Opt- In Trust. (Ex. A- 14). Thus Caplin

litigation and inconsistent results have already materialized. Plaintiffs
Trust as a vehicle to circumvent Caplin

should be rejected because the assignments cannot

transform Opt- In Claims into estate property and confer standing on Plaintiff.
67; Wit v.

Williams

at 666-

Firstar Corp.

879 F. Supp. 947 , 1000 (N. D. Iowa 1995).

In addition , Plaintifflacks standing to assert the Opt- In Claims for the independent reason

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that he cannot establish that all noteholders ' claims are assignable. Rather , each assignor

s state

law must be considered , and there are states that do not permit the assignments attempted here.

All but two of Plaintiff's claims are time- barred.
Professional negligence , COCCA and conspiracy claims are subject to a two- year statute

of limitations. Colo. Rev. Stat. 9 13- 80- 102. 5 As Plaintiff filed his complaint on November 30
2001 , Claim Nos. 16 30 and 35 are time- barred if they accrued prior to November 30 , 1999.

Those claims undoubtedly did accrue prior to November 30 , 1999. With respect

to the

malpractice claim (Claim No. 16) brought on behalf of Lifeblood , Plaintiff alleges that Lifeblood

falsely held itself out as a business " from December 1996 forward" and issued the promissory
notes that constituted the Ponzi scheme in 1997 and 1998. (Compl. ~~ 29 37- 41. )
Lifeblood

is a

corporation presumed to have knowledge of what is in its files and records and a judgment may

be premised on that presumption in the absence of contrary evidence.
Bank v.

See , e. g., First Interstate

Berenbaum

872 P.2d 1297 , 1300- 1301

(Colo. App. 1993). If the Freeborn Defendants
as part of a scheme ,

committed malpractice in October and November of 1998

Lifeblood is

presumed to have known - and , in this case , definitively would have known - of the malpractice

, Claim Nos. 3 (aiding and abetting fraud), 10 (aiding and abetting breach of fiduciary duty) Investors and 34 (conspiracy) cannot be assigned by the investors in North Carolina and Massachusetts. Title Ins. Co. v. Herzig, 413 S. E.2d 268 271 (N. c. 1992) (conspiracy claim unassignable); Horton v. New South Ins. Co. 468 S. E.2d 856 , 858 (N. c. App. 1996) (breach of fiduciary duty claim not assignable); Baker v. Allen 197 N. E. 521 , 524 (Mass. 1935) (fraud and breach of fiduciary duty claims unassignable). 4 This argument covers Claim Nos. 3 , 6 , 10 , 14 16 , 30 and 35 , where the statute of limitations is two or three years , but not Claim Nos. 33 or 34 , which have a longer limitations period. Plaintiff has dismissed his RICO , aiding and abetting RICO , and aiding and abetting COCCA claims.
v. Hoover 12 P. 3d 328 , 330 (Colo. App. 2000) (professional negligence); See also Noel Refco Group, Ltd. 989 F. Supp. 1052 , 1078 (D. Colo. 1997) (COCCA); Stump v. Gates 808 823 (D. Colo. 1991) (conspiracy). FD.I.C

3 For example

777 F. Supp.

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at the time those legal services were rendered. As a result , the malpractice claim is barred.

With respect to the claims brought on behalf of the noteholders , namely Claim Nos. 30
and 35 ,

the noteholders either knew or should have known of the fraudulent scheme prior to
Noteholders stopped receiving interest payments in mid- 1998
investigation. Section I supra.

November 30 , 1999.
February 1999 ,

and ,

in

were informed of the criminal

By early 1999

noteholders were bringing claims against Lifeblood and , by September 1 , 1999 , they learned of
Mann
s fraud conviction. Id.

Finally, by November 10 , 1999 , the noteholders were notified of
Id.

the alleged Ponzi

scheme.

Their claims had unquestionably accrued by that time , and the

noteholders had notice of those claims. The claims governed by a two- year statute are barred.

Plaintiff s fraud and breach of fiduciary duty claims are governed by a three- year statute

Colo. Rev. Stat.

9 13- 80- 102(1),

and therefore must be dismissed if they accrued prior

to

November 30 , 1998. As discussed above , the Liquidation Trust claims (Claim Nos. 6 and 14)

are time- barred
November 30 ,

by Lifeblood' s

complicity in , and knowledge of, the alleged breaches prior to

1998. The aiding and abetting fraud claim (Claim No. 3) brought by the Optstarted

Trust is also barred. Noteholders stopped receiving interest payments in mid- 1998 ,

questioning the validity of the bonding companies by October 1998 , and , by their own testimony,
knew by early November 1998
, 63: 15that Lifeblood was a fraud. (Section
supra; Ex.

18 at 58:4-

, 64:5- 16 (by November 4 , 1998

everybody in the world knew this was a fraud.

Thus , summary judgment should be granted on any claim for which the statute is three years or

less (Claim Nos. 3

, 10, 14, 16 30 and 35).

PlaintifPs aiding and abetting fraud claim is not cognizable
While aiding and abetting breach of fiduciary duty was recognized in

under Colorado law.
Holmes v.

Young,

885 P.2d 305 ,

309 (Colo. App. 1994), the Freeborn Defendants are unable to find any Colorado

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appellate authority recognizing an aiding and abetting fraud claim. As other courts explain it:

If professionals such as accountants and lawyers could be held liable for fraud

when their clients

used their services to defraud a third party without the

professionals ' intent to participate in the fraud... (sJuch professionals would either have to incur the expense of investigation into how their services were being used or be placed in the position of insurers of their clients ' honesty. Either burden would add an unacceptable cost to the provision of necessary and desirable services. Also , it seems illogical to impose liability for aiding and abetting fraud based upon a lower level of scienter than fraud itself.
Branch Banking Trust Co. v.

Lighthouse Fin. Corp.

2005 WL

1995410

at *8 (N. C. Super.

July 3 ,

2005) (refusing to recognize aiding and abetting fraud claim), attached as Ex. A- 19; Fed
Co. v. Coopers

Mgmt.

Lybrand 738 N. E.2d

842 ,

853 (Ohio App. 2000) (same).

Plaintiff has no evidence to support the essential elements of his claims.

Plaintiff cannot establish anv reliance.

Plaintiff must show detrimental
against the Freeborn Defendants.
See

reliance by the investors to

prove each of his claims
s Brief

Freeborn Defendants '

Response to Plaintiff

Concerning Burden of Proof, filed Aug. 20 , 2004. Plaintiff has no such evidence. Despite the
fact that Plaintiff has deposed numerous investors , not one of them has ever met , spoken with , or
relied upon any act of the Freeborn Defendants in purchasing or renewing their notes.

PlaintifPs aidin2 and abettin2 claims fail because the Freeborn Defendants neither knew of nor substantiallv assisted in the principal violation.
Assuming arguendo

that Plaintiff s aiding and abetting

claims are cognizable , under

Holmes Plaintiff must show that (1) Mann and Wells committed the principal violation; (2) the

Freeborn Defendants knowingly participated

in the

principal violation; (3) the Freeborn

Defendants gave substantial assistance to Mann and Wells in committing the principal violation;
and (4) the noteholders suffered damages as a result. See Nelson v. Elway,

971 P.2d 245 249-

(Colo. App. 1998);

Holmes

at 308- 09. Plaintiff cannot show these elements.

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There is no evidence that the Freeborn Defendants knowingly participated in any wrongdoing, and Plaintiff s own expert concedes that they did not.

The gravamen of aiding and abetting is the defendant's " knowing participation"
principal violation. Holmes

in the

at 309. Where claims against attorneys are involved , the elements of
construed. Witzman v.

aiding and abetting should be strictly
W.2d 179 , 186- 87

Lehrman, Lehrman

Flam 601

(Minn. 1999). As the Seventh Circuit held in affirming summary judgment:

There is no direct evidence that (the law or accounting) Firm acted with intent to deceive any purchaser. . .. There is indeed no evidence that either Firm saw any of
the... selling documents... until after the document had been placed in use.... A

plaintiff s case against an aider ,

abetter , or conspirator

may not rest on a bare

inference that the defendant " must have had" knowledge.... The plaintiff must

support the inference with some reason to conclude that the defendant has thrown in his lot with the primary violators.... In this case the Firms did not gain. They received none of the proceeds from the sales.... Both Firms billed so little time... that it is inconceivable that they joined a venture to... defraud(J investors.
Barker v.

Henderson, Franklin, Starnes

Holt 797 F.2d 490 , 496- 97 (7th Cir. 1986);

Abell

Potomac Ins. Co. 858 F.2d 1104 , 1128 (5th Cir. 1988) (although the law firm ignored several

warning signs

Aroused suspicions , however , do not constitute actual awareness of one s role in
vacated,

a fraudulent scheme.

492 US. 914 (1989).

Plaintiff has failed , despite extensive discovery, to adduce facts supporting his claim that

the Freeborn Defendants aided and abetted a fraud or breach of fiduciary
Plaintiff has not shown that these defendants
knowingly participated

duty. In particular

in any of the alleged

wrongful acts. The fact is that no such evidence exists.
concedes the Freeborn Defendants did not act with the requisite intent.

Even Plaintiff's own liability expert
(Seawell Dep.
Ex.

20 at 230:24- 231:6. ) Summary judgment therefore should be granted on Claim Nos. 3

6 and 10.

There is no evidence of substantial assistance to any fraudulent scheme.

An aiding and abetting claim also requires proof that the defendant provided " substantial

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assistance " to the principal actor.
Substantial assistance "

Nelson

971 P.2d at 250;

see also

Sept. 16 ,

2002 Order at p. 5.

is a large amount of assistance as distinguished from nominal or routine
, Inc. v.

assistance.

First Fin. Sav. Bank
C. July 5 ,

Am. Bankers Ins. Co. 1990 WL 260541 at *7-

(E.D.
as Ex.

1990) (claim requires " positive deeds of manipulation or deception. ), attached
at 189 (substantial assistance requires " more

21;

Witzman

than the provision of routine

professional services

Plaintiff cannot show that the Freeborn Defendants gave substantial
(See

assistance to Mann and Wells , who Plaintiff concedes were the masterminds of the scheme.
Compl. ~ 3; Ex.

22 at RFA 4-

) On the

contrary, the undisputed evidence shows that , upon

learning the bonding companies were not legitimate , Poyfair advised Mann to turn himself in.

The Freeborn Defendants did not provide assistance to the scheme , but instead helped stop it.
Courts recognize that a lawyer , simply by providing legal services , does not become an

aider and abettor. For example , in In re Cascade Int' l Sec. Litig.,

840 F. Supp. 1558 (S. D. Fla.

1993), the plaintiffs alleged that two law firms (i) helped prepare fraudulent SEC filings
(ii) drafted letters and press releases containing erroneous facts , (iii) defended the company
against accusations without investigating whether the company s representations were true , and
(iv) threatened individuals with legal action if they investigated the company. Id

at 1563 ,

1565.

The district court dismissed the plaintiffs ' aiding and abetting claim , in part , because:

This (substantial assistance) element has been defined as requiring... that the law firm " actively participate( d) in soliciting sales or negotiating terms of the deal on behalf of a client. . .. ... Plaintiffs have failed to allege any activities on the part of (the law firms) that constituted anything more than acting as scriveners for their clients or conducting activities that make up the " daily grist of the mill."
Id. at 1566 (internal citation omitted); Spinner v.

Nutt

631 N. E.2d 542 ,

546 (1994) (allegation

that the client had acted under the legal advice of an attorney was insufficient to state a claim
against the attorney for aiding and abetting the client's breach of fiduciary duty).

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Plaintiff has no evidence of anything more than the " daily grist of the mill" of a law firm.
Setting aside the uncontested fact that the Freeborn Defendants helped uncover

the scheme , their
assistance.

alleged acts never went beyond routine legal services. There was no " substantial

No noteholders were damaged by the alleged aiding and abetting.

Plaintiff s aiding and abetting claims also fail because Plaintiff has no evidence that any

damages were caused by the acts alleged. To the contrary, the evidence shows that no damages

could have been caused by the Freeborn Defendants. The alleged

acts of aiding and abetting

occurred from mid- October to November 1998. However , the Ponzi scheme ended on October

, 1998 (with respect to Wells) and September 30 , 1998 (with respect to Mann). (Ex. A- 23 at
13; Ex.

24 at 13. )

Any acts occurring after the Ponzi scheme had already ended could not

have aided the scheme , and could not have caused the noteholders any damage.

Moreover , the note proceeds had been spent - and the damages had been incurred - by
early October 1998.

6 The Freeborn Defendants

' actions did not occur until mid- October , and

therefore could not have caused further damage.

Plaintiff has no evidence necessary to support his COCCA claim.

The elements of COCCA are even more onerous than those for aiding and abetting,
requiring Plaintiff to

show that (1) the

Freeborn Defendants

(2) through a " pattern" of

racketeering activity " (3) directly or indirectly participated in the conduct of (4) an enterprise

and that (5) the noteholders were injured as a result. Colo. Rev. Stat. 9 18- 17- 104.

The burden

6 Plaintiffs damage expert admits that all but $347,186

, 1998 ,

and , by October 1998

all of

of the damages had been sustained by September the damages had been sustained. (Schulman Dep. , Ex. A- , at

159:22- 160:3 161:18- 162:14.

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).
Case 1:01-cv-02315-LTB-CBS Document 500

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Filed 12/29/2005

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of proof under COCCA is clear and convincing

evidence. Colo. Rev. Stat. 9 18- 17- 106(11).

Plaintiff cannot meet this heavy burden. As a result , Claim No. 30 should be dismissed.
There is no evidence

that the Freeborn Defendants participated in the

conduct of an enterprise.

A person cannot participate in the conduct of an enterprise unless he participates in the
operation or management of the enterprise itself. Reves v. Ernst Young,

507 US. 170 , 185

(1993)? And ,

the courts have uniformly held that an attorney does not become a participant
Seidl v.

simply by providing legal services.

Greentree Mortg. Co.

30 F. Supp. 2d 1292 , 1305

(D. Colo. 1998) (" attorney does not participate in the operation or management of an enterprise
by offering legal advice or otherwise represent(ing) a client."
1316 (8th Cir. 1993) (same); Nolte v.

Pearson

994 F.2d 1311

Biofeedtrac, Inc.
590- 91 (E.D.

v.

Kolinor Optical Enters.

Consultants, s.R.

832 F. Supp. 585 ,

Y. 1993) (though attorney intended to advance client's scheme

to defraud , no liability could be imposed because attorney s role was confined to providing legal
services. ).
activities.

Instead ,

there must be evidence that the attorney
v. Berg,

directed

the enterprise

s business

Gilmore

820 F. Supp. 179 ,

183 (D.

I. 1993) (dismissing RICO claim where

attorney prepared partnership documents but did not direct client to engage in the transactions).

Plaintiff has no evidence that the Freeborn Defendants provided anything other than legal
services. They held no management or board positions in the Lifeblood entities , and received no

compensation above their usual hourly rate. Certainly, the Freeborn Defendants never directed

7 Although Reves respects. Compare

was decided under RICO , the relevant provision with 18 Colo. Rev. Stat. ~ 18- 17- 104(3)

of

COCCA is identical in all material

Interstate Bank
RICO are instructive.

937 F. Supp. 1461 , 1471 (D. Colo. 1996) (" COCCA
New Crawford Valley, Ltd. v.

clause (and) the difference is insignificant... "

See also FD.I.C v. First and RICO differ only in the last COCCA was modeled after RICO , and cases interpreting

u.S. c.

~ 1962(c).

Benedict

877 P.2d 1363 ,

1370 (Colo. App. 1993).

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the business operations of the alleged

enterprise (either Lifeblood or the Lifeblood

Ponzi

scheme). As the Ninth Circuit held under similar facts , a COCCA claim cannot stand:

(T)he preparation of two letters... a partnership agreement... and assistance in
(The attorney) at no time held any formal position in the limited partnership. Nor did he play any part in directing the affairs of the enterprise. (His) role was limited to providing legal services to the limited partnership and (the corporation that formed the partnership). Whether (the attorney) rendered his services well or Reves poorly, properly or improperly, is irrelevant to the test. We are therefore
a... Chapter 7 proceeding... does not suffice to impute liability under Reves. compelled to conclude that under the Reves

operation or management" test the

complaint fails to allege a 9 1962( c) cause of action as to (the attorney).
Baumer v.

Pachl

8 F. 3d

1341 ,

1344 (9th Cir. 1993). The result should be no different here.

Plaintiff has no evidence of intent on the part of the Freeborn Defendants.
One cannot negligently commit a COCCA violation. People v.

Chaussee 880 P.2d 749

758 n. 12 (Colo. 1994) (" (A)

pattern of racketeering

activity is not in itself an offense under
knowingly

COCCA. Rather.. . it must

be shown that the person...

conducted or participated in
Plaintiff has

such enterprise through the pattern of racketeering activity. " (Emphasis added. )).

no evidence of intent , a fact his own liability expert concedes. (Ex. A- 20 at 230:24- 231 :6.

Plaintiff has no evidence of a " pattern" of racketeering activity.

Plaintiff lacks any evidence of the requisite " pattern" of racketeering activity. A pattern
of racketeering activity must

include the commission of at least two predicate acts which are
9 18- 17-

related to the conduct of the enterprise. Colo. Rev. Stat.

103(3). While two predicate
Sedima, s.PR.L.

acts are necessary to establish a pattern , they are not necessarily sufficient.
Imrex Co. ,

Inc. 473 US. 479 , 496 n. 14 (1985) (" in common parlance two of anything do not

generally form a ' pattern , ", and legislative history supports the view that two isolated acts of

racketeering activity are not a pattern. ).
in fact have committed ,

Further

each defendant

must have agreed to commit , or

two or more

predicate crimes as part of his participation in the

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g.,

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enterprise.

See

Feinstein

v.

RTC

942 F.2d 34 41 (1st Cir. 1991).

The racketeering activity for which Plaintiff seeks damages is a Ponzi scheme that ended
on October 13 ,
at 13.

1998 (for Wells) and September 30 , 1998 (for Mann). (Ex. A- 23 at 13;

Ex.

) It is uncontested that the notes were all sold prior to October 1998 , but that the Freeborn

Defendants did not know the notes existed until October 20 , 1998 , and did not learn of the fraud
until November 24 , 1998. The acts about which Plaintiff complains (e. , drafting of the script)

are not predicate crimes and , in any event , occurred
evidence of even one

after

October 13 ,

1998. Plaintiff has no

predicate act that occurred during the pendency of the scheme , much less a
each

pattern. Certainly, Plaintiff cannot point to a pattern on behalf of

Freeborn Defendant.

No noteholders were damaged by the alleged predicate acts.
A COCCA plaintiff must prove that each predicate act was the proximate cause

of his

injuries.

Deck 349 F. 3d at 1257;

Floyd

v.

Coors Brewing Co. 952 P.2d 797 ,

803 (Colo. App.

1997),

rev d on other grounds 978 P.2d 663 (Colo. 1999). None of the Freeborn Defendants
supra.

actions caused any injury to the noteholders. Section III.C.2.

On the contrary, it is

uncontested that all the notes were sold before the Freeborn Defendants even knew they existed.

Plaintiff has no evidence that the Freeborn Defendants breached anv dutv. or that anv alle2ed breach of dutv caused Plaintiff anv dama2es.
To recover for breach of fiduciary duty, Plaintiff must establish that (1) a fiduciary duty
existed; (2) that duty was breached; and (3) damages resulted. Miller v.

Byrne 916 P.2d 566 , 575

(Colo. App. 1995). The Freeborn Defendants represented certain Lifeblood Entities , and owed
those clients fiduciary duties.
breached any duty. Indeed ,
There is no evidence ,

however ,

that the Freeborn

Defendants

the companies ' principals testified that they met or exceeded the
Ex.

standard of care. (Ex. A- 4 at 461:22- 464:3;

3 at 375:12- 380:4 415:16- 23.

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Plaintiff s breach of fiduciary duty and negligence claims also fail because Plaintiff has

no evidence of causation. Section III.C.2.
dismissed.

supra.

Claim Nos. 14 and 16

therefore must be

CJI

Civ.

4th 99 9: 18 and 9:20 (those claims require proof that defendant's conduct

was a cause " without which the claimed injury would not have happened.

The Freeborn Defendants did not participate in a conspiracv.
Conspiracy requires proof of: (1) two or more persons; (2) an object to be accomplished;
(3) a meeting of the minds on the obj ect or course of action; (4) one or more unlawful overt acts;
and (5) resulting damages.

Jet Courier Serv. ,

Inc.

v.

Mulei

771 P.2d 486 , 502 (Colo. 1989).

Moreover , an attorney, being an agent of his principal , cannot be held liable for conspiracy with

his principal where he acts within the scope of his authority and does not actively participate in a
fraud.

Astarte , Inc.

v.

Pac. Indus. Sys. ,

Inc.

865 F. Supp. 693 , 708 (D. Colo. 1994).

8 Plaintiff

cannot prove any element of conspiracy. Not one person has said that the Freeborn Defendants

were involved in the promissory

note scheme.

Not one alleged

co-conspirator has ever

implicated the Freeborn Defendants. Plaintiff has no evidence of any conspiratorial conduct.

Plaintiff cannot prove any entitlement to punitive damages.

Punitive damages are available only where " the injury complained of is attended by
circumstances of fraud , malice , or willful and wanton conduct." Colo. Rev. Stat. 9 13- 21- 102(1).

Macke Laundry

Svc.

LP.

v.

Jetz

Svc

general rule that attorney cannot conspire with client);

Co. , Inc. 931 S. W.2d 166 , 176 (Mo. App. 1996) (citing cases for Fraidin v. Weitzman 611 A.2d 1046 , 1079- 1080

(Md. App. 1992) (" It is established law that there can be no conspiracy between a principal and an agent his her employment... (T)o substantiate a conspiracy claim of or injuring the plaintiff must establish that the attorney acted without legal justification and with the intent of (and) that the attorney did not act within the role of an advisor and merely advise , but instead knew of the client s wrongful conduct and was actively involved in the wrongful conduct... .
where the agent acts within the scope

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).
Case 1:01-cv-02315-LTB-CBS Document 500 Filed 12/29/2005 Page 19 of 22

These elements must be proven beyond a reasonable

doubt. Colo. Rev. Stat. 9 13- 25- 127(2);
law.

The sufficiency of the evidence to justify a punitive damage award is a question of
Aspen Constr. Co. v.

Tri-

Johnson 714 P.2d 484

486 (Colo. 1986).

Plaintiff has no evidence at all , let alone sufficient to prove beyond a reasonable doubt
that the Freeborn Defendants acted with the requisite " evil intent."
Inc.
798 F.2d 1341 ,
Juarez v.

United Farm Tools

1342 (10th Cir. 1986). On the contrary, the Freeborn Defendants were not

involved in issuing the notes

, and did not even know the notes existed

until after the

fact.

Plaintiff s own expert concedes that the Freeborn Defendants did not intentionally participate in
a scheme. Rather , it is undisputed that they uncovered it , and were instrumental in getting Mann

to turn himself in. It is also undisputed that the Freeborn Defendants had nothing to gain by any

misconduct. The note proceeds were not diverted to them , but were diverted by Mann and
Wells. (Compl. ~
2; Ex.

22 at RFA No.

) These

facts do not approach the level of evil

conduct required for a punitive damage award.

Plaintiff cannot recover prejudgment interest from the Freeborn Defendants,
because they did not " wrongfully withhold" money or property.
The right to recover interest where ,
as here

, there is no agreement to pay it ,

is strictly

limited to the circumstances enumerated in Colo. Rev. Stat. 9 5- 12- 102.
Inc. v.

South Park Aggregates
The

Northwestern Nat' l

Ins. Co.

847 P.2d 218 ,

226 (Colo. App. 1992).

statute plainly

requires that money or property have been

wrongfully withheld

in order for prejudgment interest
at 227 (" To interpret 95- 12- 102 as
meaningless the statutory

to be awarded. Colo. Rev. Stat. 9 5- 12- 102(1);
permitting recovery for all

South Park

compensatory damages... would render

language limiting prejudgment interest to that money or property ' wrongfully withheld "'

One

reason for this prerequisite is to limit prejudgment interest to situations where the defendant has

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Page 20 of 22

had the use of the
Nat' l Fire Ins. Co.

amounts wrongfully withheld.

See Frontier Exploration,

Inc.

v.

American

849 P.2d 887 , 893 (Colo. App. 1992).

9 As a result , where the defendant is
money, prejudgment interest is not

not the party who wrongfully withheld the plaintiff s
recoverable. Messler v.

Phillips

867 P.2d 128 (Colo. App. 1993).

As in

Messler

the undisputed facts establish that the Freeborn Defendants never
withheld

received , let alone " wrongfully

" money or property from noteholders.

Rather ,

it was

Mann and Wells who diverted note proceeds. 10 Plaintiff is not entitled to prejudgment interest.
IV.
Despite years of

CONCLUSION
whatsoever to

discovery, Plaintiff has no evidence

support his

speculative allegations. In fact , all

evidence is to the contrary, and shows that the Freeborn
The Freeborn

Defendants had no complicity in

or even knowledge of the Ponzi scheme.
in a

Defendants simply acted as lawyers - not participants

scheme. It is uncontroverted that

when the Freeborn Defendants did learn of the scheme , they counseled Lifeblood' s chief officer

to turn himself and the company in to the authorities. As shown in the numerous cases cited
above that granted summary judgment in favor of attorney defendants a plaintiff cannot create

a disputed issue of material fact simply by showing that the defendants provided legal services.
In this case , Plaintiff can show nothing else. Summary judgment therefore
should be granted.

, and only if, this threshold requirement is met , does the Court need to determine the appropriate rate interest. Colo. Rev. Stat. ~ 5- 12- 1O2(l)(a) and (b). If the Court determines that prejudgment interest is recoverable , the Freeborn Defendants will address at trial the rate to be applied.
of prejudgment

9 If

003 that Plaintiffs expert acknowledges is the total amount Freeborn & Peters was paid by the Lifeblood Entities. (Ex. A- IO at 10 , Fig. 6. ) There is no
evidence that the $69 003 came from note proceeds , however.

10 The only possible exception could be the $69

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Page 21 of 22

Dated this 29th day of December 2005.
sf Carolyn I. Fairless Carolyn I. Fairless Wheeler Trigg Kennedy LLP 1801 California Street , Suite 3600 Denver , CO 80202

Fax: fairless~wtklaw.
E-mail:

Telephone: (303) 244- 1800 (303) 244- 1879

com

ATTORNEYS FOR DEFENDANTS FREEBORN & PETERS LLP , MICHAEL SABlAN , DARWIN I. POYFAIR

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Page 22 of 22

CERTIFICATE OF SERVICE

(CM/ECF)

I hereby certify that on December 29 , 2005 , I electronically filed the foregoing FREEBORN DEFENDANTS' RE- FILED SUMMARY JUDGMENT BRIEF with the Clerk of Court using the CM/ECF system which will send notification of such filing to the following email 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/ECF participant: W. Jeffrey Mann 419 Abbeyridge Court Ocoee , FL 34761
sf Carolyn J. Fairless by Janean C. Hart Carolyn J. Fairless Attorney for Defendants Lori Pollock and Lani Pollock Wheeler Trigg Kennedy LLP 1801 California Street , Suite 3600 Denver , CO 80202

Fax:
Email:

Telephone: (303) 244- 1800 (303) 244- 1879

fairless~wtklaw. com

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