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

Case 1:04-cv-01258-LTB-BNB

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Civil Action No. 04-cv-1258-LTB-BNB STUDENT MARKETING GROUP, INC., Plaintiff, v. COLLEGE PARTNERSHIP, INC., f/k/a COLLEGE BOUND STUDENT ALLIANCE, INC., Defendant. ______________________________________________________________________________ REPLY BRIEF FOR APPROVAL OF SUPERSEDEAS BOND ______________________________________________________________________________ Defendant College Partnership, Inc. ("College Partnership"), by and through its counsel, Rosemary Orsini and Brian K. Matise of Burg Simpson Eldredge Hersh & Jardine, P.C., hereby submits its Reply Brief in support of its Forthwith Motion for Approval of Supersedeas Bond.

SUMMARY OF ARGUMENT The issue before the Court is a narrow one: what security (type and amount) should be required in order to adequately protect Plaintiff's ability to collect on its judgment during the appeal of this matter? College Partnership is not asking the Court to stay execution on the judgment without requiring a bond. College Partnership is not requesting a supersedeas bond for less than the amount of the judgment. College Partnership only requests that the Court accept as collateral a real property bond because it simply does not have cash and cannot obtain a supersedeas bond from a bonding company under any terms or at any price. College Partnership

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is willing to put up as collateral any of its real property; College Partnership's largest shareholder offered the gypsum mining claim as collateral because it was unencumbered and because its appraised value far exceeded the amount of the judgment (even with all costs and attorney fees sought by Plaintiff). This Court need only answer the following questions to decide the motion: 1) What amount of supersedeas bond should be required in this case?; 2) Whether College Partnership has objectively demonstrated that a cash bond, letter of credit, or supersedeas bond from a commercial surety are unobtainable to it on any reasonable terms?; and 3) What alternative collateral should be required to provide adequate security to Plaintiff? College Partnership respectfully suggests that the Court set the amount of supersedeas bond at the full amount (100% or $127,462.59) of the judgment entered or, if the Court requires additional security for interest and costs on appeal, the Court set the bond amount at not more than 125% of the amount of the judgment ($159,328.24). College Partnership also respectfully requests that the Court agree that it has presented sufficient objective evidence that it is unable to post a cash bond, letter of credit, or supersedeas bond from a commercial surety given its present lack of liquidity. College Partnership finally suggests that the Court accept as collateral a real estate lien - either the mining claim previously suggested or, if the Court deems that collateral insufficient, that College Partnership be permitted to use other real estate collateral with an unencumbered value based on an appraisal of at least twice the amount of the bond.

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I.

COLLEGE PARTNERSHIP DOES NOT SEEK A SUPERSEDEAS BOND OF LESS THAN THE FULL AMOUNT OF THE JUDGMENT. Plaintiff cites a number of cases for the proposition that "a party seeking a stay pending

appeal usually must post a full security supersedeas bond for the full amount of the judgment." The cases cited do not apply to this matter, where College Partnership is not seeking approval of a supersedeas bond for less than the amount of the judgment. Miami Int'l Realty Co. v. Paynter, 807 F.2d 871, 873 (10th Cir. 1986) involved a dispute over the amount of the supersedeas bond, not the collateral used for the bond. In that case, the judgment debtor sought a supersedeas bond for $500,000 even though the judgment was in the amount of $2,100,000. Id. at 872. This Court (Hon. Richard P. Matsch), affirmed by the Tenth Circuit Court of Appeals, approved the $500,000 supersedeas bond on the grounds that the judgment creditor did not refute the judgment debtor's evidence that he was unable to post the full supersedeas bond, and that execution on the judgment would force the judgment debtor into insolvency. Id. at 874. The type of collateral used for the bond was not an issue whatsoever in that case. Poplar Grove Plainting & Refining Co. v. Bache Halsey Stuart, Inc., 600 F.2d 1189. 1190-91 (5th Cir. 1979) involved a judgment in excess of $270,000, where the court approved a supersedeas bond of only $10,000. The Fifth Cicuit Court of Appeals remanded the matter to the district court, on the grounds that there was nothing in the record to support the amount of the bond. Id.at 1191. The Fifth Circuit Court of Appeals expressly held that on remand, the district court should consider, in its discretion, substitute security if the judgment debtor's financial condition were such that posting a full bond would impose an undue financial burden. Id.

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Accordingly, Poplar Grove supports College Partnership's argument that substitute collateral is appropriate under circumstances where a full bond would impose an undue financial burden. In Endress & Hauser, Inc. v. Hawk Measurement Sys., 932 F. Supp. 1147, 1148 (S.D. Ind. 1996), the judgment creditor proposed paying only $5,000 per month to the Clerk toward a judgment in excess of $256,000. The court applied the same two-part test used in Olympia Equip. Leasing Co. v. Western Union Tel. Co., 786 F.2d 794 (7th Cir. 1986) in its analysis: (1) it considered whether the financial condition of the debtor made it impossible to obtain a supersedeas bond from a surety or to post cash, and (2), it considered whether the proposed alternate security was adequate. Endress & Hauser, 932 F. Supp. at 1149-50. The Court concluded that the judgment debtor met the first part of the test, a showing that it could not post a cash bond or obtain one from a surety, by showing: 1) it had a negative net worth of $4.5 million; 2) it had only $60,000-$70,000 of cash on hand; and 3) it contacted two bonding companies, both of whom declined to issue a bond. Id. However, the Court concluded that it did not meet the second part of the test - i.e., adequate protection for the judgment creditor - because $5,000 a month payments would yield only $90,000 after 18 months - less than 35% of the judgment. Id. at 1150. The Court suggested that the judgment debtor might grant the judgment creditor a security interest in property (as College Partnership is offering here). Id. However, it noted that the judgment debtor already granted security interests in substantially all of its property to other creditors. Id. Endress & Hauser supports allowing a bond in this case, because College Partnership has demonstrated even more compelling evidence that it cannot obtain a bond but it has proposed unencumbered alternative security far in excess of the value of the judgment. In the present case, the amount of the bond is not an issue. College Partnership is not -4-

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seeking a supersedeas bond for one cent less than the full amount of the judgment. Although College Partnership proposes a supersedeas bond amount equal to the amount of the judgment, College Partnership acknowledges that the Court, in its discretion, may set the amount of the bond at an amount that would include post-judgment interest and costs. Such bond amounts are typically no more than 125% of the judgment. Because College Partnership is not seeking a bond amount less than the judgment, not one of the cases cited by Plaintiff is in conflict with College Partnership's application. Accordingly, the Court should reject Plaintiff's misleading use of these cases where the issue was an application for a supersedeas bond in an amount far less than the judgment.

II. PLAINTIFF DOES NOT DISPUTE THAT THE COURT SHOULD ALLOW ALTERNATE SECURITY IF COLLEGE PARTNERSHIP SATISFIES THE TWO-PART OLYMPIA EQUIPMENT TEST.

Plaintiff does not dispute that the Court has discretion to allow alternate security if College Partnership demonstrates that its financial condition is such that it cannot post a cash bond, letter of credit, or surety bond. See, e.g., Waffenschmidt v. Mackay, 763 F.2d 711, 727 (5th Cir. 1985) ($31,042.50 worth of boats, motors, and trailers approved as a substitute supersedeas bond for a $106,840.09 judgment); Fehlhaber v. Fehlhaber, 941 F.2d 1484, 1487 (11th Cir. 1991) ($1,500,000 in stocks, other securities, and other trust assets substituted as security for a $10,000,000 judgment); Townsend v. Holman Consulting Corp., 881 F.2d 788, 796-97 (9th Cir. 1989) (court has broad discretion to waive bond requirement or to allow alternate security, even if judgment debtor does not show financial hardship).

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College Partnership's motion presented the two-part test of Olympia Equip. Leasing Co. v. Western Union Tel. Co., 786 F.2d 794 (7th Cir. 1986) that is used to determine whether to permit alternate security: first, the judgment debtor demonstrates that it is unable to secure a supersedeas bond from a surety despite diligent efforts, and second, that the property bond provides equivalent security for the judgment creditor. Plaintiff cited Olympia Equip. in its response; accordingly, the Court should look to this two-part test to determine whether alternate security is appropriate here.

III.

COLLEGE PARTNERSHIP'S LACK OF LIQUIDITY PREVENTS IT FROM POSTING A CASH OR SURETY BOND.

College Partnership presented affidavits from Janice Jones that College Partnership attempted to obtain, but could not obtain, a letter of credit from its banks. See Affidavit of Janice Jones ¶ 4. College Partnership's attorneys also contacted all known sureties in this area, and were unable to obtain a supersedeas bond in the amount of the judgment from any of these - on any terms whatsoever - without posting the full amount of the bond in cash, or obtaining a letter of credit from its bank in the full amount of the judgment (which letter of credit could not be obtained at all per Janice Jones' affidavit). The current environment for supersedeas bonds is unforgiving - all sureties known to College Partnership and its attorneys require essentially "no risk" cash, escrow deposit, or letter of credit collateralization in the full amount of the bond. See Declaration of Brian Matise, attached as Exhibit 4 to this Reply. Plaintiff argues that College Partnership failed to explain what price it offered to pay for a surety bond; College Partnership could not obtain a surety bond -6-

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for any price less than full cash or letter of credit collateralization. As College Partnership's affidavits indicate, it simply does not have the $127,000 + cash, nor can it obtain a letter of credit. Plaintiff cites College Partnership's financial statements with the SEC for the proposition that College Partnership does have financial resources. These financial establish just the opposite: 1) College Partnership had only $28,856 cash on hand as of April 30, 2005 (less than 25% of the judgment amount) (Form 10QSB/A attached to Response, at p. 3); 2) College Partnership had an accumulated deficit of $11,410,414 and negative net worth of $3,668,080 as of April 30, 2005. Id. 3) College Partnership had current liabilities of $9,385,303 versus current assets of $2,577,344 as of April 30, 2005. Id. 4) College Partnership lost $1,098,454 for the three months ended April 30, 2005. Id. at 4. 5) College Partnership's financial statement at Note 1 includes a notation that "these matters raise substantial doubt about the Company's ability to continue as a going concern." Id. at 7. 6) Although the financial statements did not list this particular litigation as likely to have a "material effect" given that the amount sought was approximately $127,000, College Partnership did list two other matters in litigation with demands of $226,000 and $500,000. Subsequent to the April 2005 financial statement, College Partnership entered an agreement in an unrelated matter. Execution on this judgment will constitute a condition of default as to that -7-

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contract, which can result in immediate entry of a stipulated judgment of approximately $450,000-$500,000. If the stipulated judgment of that magnitude (i.e., $450,000 to $500,000) is entered, there could be a material adverse effect, as such a judgment would be on the order of magnitude of the legal proceedings listed on Page 23 of the Form 10 QSB/A.

IV.

THE WRITEDOWN OF THE GYPSUM ASSETS PURSUANT SFAS 144 DOES NOT REFLECT NEGATIVELY ON THE ACTUAL ECONOMIC VALUE OF THOSE ASSETS.

Chartwell International, the predecessor in interest of Kingsley Capital, adopted SFAS 144 in its 2004 fiscal year and wrote down the value of the gypsum mining claim for financial reporting purposes to shareholders only. SFAS 144 was promulgated by the Financial Accounting Standards Board in August 2001 to more conservatively value certain "long lived assets" that are not generating current cash flow. See Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, Financial Accounting Standards Board, Norwalk, CT, August 2001. Chartwell had held the gypsum mining rights for a number of years as an investment, but did not mine the gypsum. Adoption of SFAS 144 required long-lived assets not generating current cash flow to be written off. Ronald Chadwick, P.C., the accountant for Chartwell and Kingsley Capital, has prepared a statement indicating that the write-down of the gypsum mining rights pursuant to SFAS 144 does not indicate that the economic value of the property (in excess of $2,000,000) is invalid; rather, the writedown reflects the lack of cash flow from development of the asset. See Exhibit 5, attached.

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In the event that the Court has any doubts regarding the value of the gypsum rights, College Partnership requests a hearing to present additional evidence in the form of expert testimony. Due to the expedited time frame of this Motion, such testimony could not be obtained prior to filing this reply. Alternatively, College Partnership requests that the Court consider alternate real property interests as collateral. As the Chartwell International report indicates, Chartwell (now Kingsley Capital) has additional real estate assets that can be pledged as collateral. College Partnership requests that it be permitted a reasonable opportunity to present to the Court collateral once the Court sets the amount of the bond.

V. CONCLUSION Prior to the beginning of this litigation (and on the very date the disputed payment was originally due, June 1, 2004), Plaintiff's founder, Jan Stumacher, threatened that he would take whatever action was necessary to ruin College Partnership - including such bizzare actions as contacting the SEC, CPI's creditors, CPI's shareholders, the FTC (for using minors' names - the very names that SMG was providing to CPI!) See Exhibit 6, attached. Although College Partnership has consistently disputed that it received the goods and services that it believed it was entitled to under the contract, this Court did not agree. However, a monetary judgment against College Partnership does not entitle Jan Stumacher to ruin College Partnership. The Court should permit College Partnership to post a property bond that will adequately protect SMG's judgment while allowing College Partnership to appeal.

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WHEREFORE, College Partnership respectfully requests that the Court enter Orders as follows: A. B. Setting the amount of a supersedeas bond in this matter at $127,462.59; Approving the First Security Lien as security for the judgment in lieu of a cash bond or surety bond; C. In the alternative, allow College Partnership to post such other real property as collateral as the Court may permit following a hearing; D. Staying enforcement of the judgment in this matter pending appeal upon posting an appropriate property bond; E. Granting Defendant such other and further relief as the Court deems just under the circumstances.

DATED this 16th day of September, 2005.

Respectfully submitted, BURG SIMPSON ELDREDGE HERSH & JARDINE, P.C.

Brian K. Matise 40 Inverness Drive East Englewood, Colorado 80112 Telephone: (303) 792-5595 Facsimile: (303) 708-0527 ATTORNEYS FOR DEFENDANT COLLEGE PARTNERSHIP, INC. -10-

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CERTIFICATE OF SERVICE

I hereby certify that on this 16th day of September, 2005, I filed and/or served a true and complete copy of the foregoing REPLY BRIEF FOR APPROVAL OF SUPERSEDEAS BOND, to the following:

Gary Parish, Esq. R. Daniel Scheid, Esq. Sander, Scheid, Ingebretsen, Miller & Parish P.C. 700 17th St., Suite 2200 Denver, CO 80202 Patrick J. McElhinny, Esq. Dianna S. Karg, Esq. Kirkpatrick & Lockhart LLP 535 Smithfield St. Henry W. Oliver Building Pittsburgh, PA 15222 _________________________________ Brian Matise

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