Free Brief in Opposition to Motion - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 1:04-cv-1258-LTB-BNB STUDENT MARKETING GROUP, INC., Plaintiff, v. COLLEGE PARTNERSHIP, INC., f/k/a COLLEGE BOUND STUDENT ALLIANCE, INC., Defendant. MEMORANDUM IN OPPOSITION TO DEFENDANT COLLEGE PARTNERSHIP INC'S MOTION FOR APPROVAL OF SUPERSEDEAS BOND AND TO STAY PROCEEDINGS TO ENFORCE JUDGMENT PENDING APPEAL

Plaintiff Student Marketing Group, Inc. ("SMG"), by and through its undersigned counsel, files this Memorandum in Opposition to College Partnership Inc.'s ("CPI") Motion for Approval of Supersedeas Bond and to Stay Proceedings to Enforce Judgment Pending Appeal. I. INTRODUCTION

Since August 22, 2005, CPI has been attempting to avoid payment of the $127,462.59 that it owes SMG. Now that this Court has seen through the excuses proffered by CPI, it has filed its Motion to Stay in a desperate attempt to stave off the day of reckoning once again by offering a "First Security Lien" on certain mining claims that are owned by CPI's major

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shareholder and are allegedly worth more than $4 million. Filings with the Securities & Exchange Commission ("SEC"), however, cast serious doubt upon the veracity of the assertions in CPI's Motion and the supporting Affidavit of Janice A. Jones regarding the true value of the mining claims and the impact of this judgment on CPI's financial situation. Specifically, although CPI asserts that the mining claim is worth millions of dollars, in March 2005, the SEC required CPI's major shareholder to write down to zero the value of the mining claim. Furthermore, although CPI raises the specter of dire financial consequences if its Motion is denied, its own most recent SEC filings claim that an adverse outcome in this litigation would not have a material effect on its financial position. This evidence precludes CPI from carrying its burden of proving that: (1) extraordinary circumstances exist that justify departing from the usual requirement of a full security bond; and (2) the proposed alternative security is adequate to protect SMG's interests. CPI's Motion should be denied. II. FACTS

On August 22, 2005, the Court entered judgment in favor of SMG, awarded SMG damages in the amount of $127,462.59, and ordered SMG to submit its application for attorneys' fees.1 In response to the judgment against it, CPI filed a motion seeking to stay enforcement of SMG's judgment pending an anticipated appeal and seeking court approval of alternative security. As security for the stay, CPI requests that, in lieu of a supersedeas bond, the Court approve a First Security Lien on a mining interest that its major shareholder, Kingsley Capital,
1

SMG did submit a fee application, claiming fees and expenses of $267,571.37. -2-

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LLC ("Kingsley"), purportedly owns. CPI Motion, ¶¶ 4-7. Facts establishing CPI's financial condition and the alleged adequacy of the proposed alternative security are relevant to CPI's Motion. A. CPI's Financial Condition Aside from conclusory assertions that CPI does not have liquid funds, cannot obtain a letter of credit from an unidentified bank and unsuccessfully inquired about surety bonds from unspecified "sureties and insurance agents," see Affidavit of Janice A. Jones at ¶ 4; Affidavit of Keri L. Dugan, Burg Simpson legal assistant, at ¶ 3, CPI provides no actual information about its financial position. Indeed, CPI provides not a single financial statement to support its argument. Accordingly, SMG has attached the Form 10-QSB/A that CPI filed with the SEC on June 27, 2005 for the quarter April 1, 2005 as Exhibit 12 and the Form 10-KSB that CPI filed with the SEC on December 13, 2004 for the year ended July 31, 2004 as Exhibit 2 to this response. SMG has no information about CPI's financial status after April 1, 2005, and CPI has provided none to the Court. While the attached financial statements show that CPI faces some financial challenges, they contradict CPI's assertion ­ which is conspicuously not supported by affidavit ­ that "College Partnership has covenants and other contract terms with creditors that could result in creditors declaring defaults on other obligations in the event that Plaintiff takes action to execute on the judgment. Such action could have serious financial implications for [CPI] and its

SMG's copy of CPI's Form 10-QSB/A did not contain page numbers. Thus, for the convenience of the Court, SMG added page numbers to the copy. -3-

2

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other creditors and potential creditors . . . ." Motion at ¶ 14. For example, even though CPI filed the 10-Q and 10-K while this litigation was pending, it did not specifically describe this litigation in those filings. To the contrary, both filings state generally that CPI is "involved in claims, legal actions, regulatory inquiries and interpretations arising in the ordinary course of our business, the resolution of which is not expected to have a material effect on our financial position or results of operations." See CPI's Form 10-QSB/A at p. 23; CPI's Form 10-KSB at p. 6. Furthermore, it appears that CPI has not made any SEC filings or disclosures that the judgment has been entered in SMG's favor or that it now faces "serious financial implications," again suggesting the amount of the award is immaterial. The attached financial statements also show that CPI had revenue of $11,498,317 for the nine months ended April 30, 2005 and that the revenue and income for the quarter ended April 30, 2005 is likely to reflect the low ebb of CPI's annual cyclical cash position. See CPI's Form 10-QSB/A at p. 4; see also CPI's Form 10-KSB at p. 13 ("In addition, management believes that our business is somewhat seasonal with average customer contract signings declining in the period beginning at Thanksgiving and ending at the New Year's Holiday and during the summer school vacation period"). Since CPI asserted in the filing for April 2005 that it needed an additional infusion of cash to remain in operation beyond July 2005, and it remains in operation today, CPI's Form10-QSB/A at pp. 8, 18-19; CPI's Form 10-KSB at pp. 12-13, it presumably obtained that cash and is in a significantly better financial position today than it was as of April 30, 2005.

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B.

The Proposed Alternative Security The proposed alternative security is a First Security Lien on a gypsum mining

interest near St. George, Utah, purportedly owned by CPI's most significant shareholder, Kingsley Capital. There are significant facts about this mining interest that are not disclosed in the Jones Affidavit that, at a minimum, raise serious questions about its value and the veracity of the Affidavit. According to SEC filings signed by Ms. Jones3 for the fiscal year ended July 31, 2004, Chartwell International, Inc. ("Chartwell"), owned a "substantial equity" interest in CPI (approximately 24%) as well as the mining interest now proffered as alternative security. To avoid the disclosure requirements and costs associated with Sarbanes-Oxley, Chartwell transferred its CPI stock, real estate, mineral claims, assets, liabilities and operations in January 2005 to its wholly owned subsidiary, Kingsley. Kingsley stock was then distributed to Chartwell shareholders. As of March 3, 2005, Kingsley was to remain a private entity, would not seek to be publicly traded and therefore would not be required to make financial reports. See generally Chartwell International, Inc.'s Form 10-KSB/A-1 dated April 21, 2005, attached hereto as Exhibit 3; Chartwell's Form 8-K dated March 3, 2005 at p. 4 of 5, attached hereto as Exhibit 4. Jones was Chairperson of the Board, Chief Executive Officer, Treasurer and Director at Chartwell and is an Officer and Director at Kingsley. Kingsley, like Chartwell, is headquartered at CPI's offices.

3

Jones, an officer and director of CPI, also is the wife of CPI's CEO, Jack Grace. -5-

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Jones claims that Kingsley is carrying the mining claims on its books as a capital asset worth approximately $2 million, which is substantially less than the $3.6 to $8.7 million at which it allegedly is appraised. Jones Affidavit, ¶ 9, 10. Prior to the spin-off of Kingsley from Chartwell, however, the SEC required Chartwell to write down the mining claims from $2,014,800 to zero. See Chartwell's Form 10-KSB/A-1 at p. 29 of 48. Indeed, Chartwell's 10-K states that it had been unsuccessful in attempts to develop or sell the mineral properties, that it was in no discussions with any potential buyer of the claims and there was no assurance that it could sell the claims on acceptable terms. Id. at pp. 5, 10, 29 of 48. These statements stand in stark contrast to the conclusory assertions on the Jones Affidavit that, "Kingsley Capital is seeking to sell the mining claims . . . ." Jones Affidavit ¶ 8. Additionally, Jones asserts that there are no other existing liens, mortgages, or other security interests on the mining claims, Jones Affidavit, ¶ 7, but the Chartwell 10-K belies this assertion. It states that Chartwell owned residential real estate near Ramona, California encumbered with a $600,000 lien relating to notes and interest payable to Mr. John J. Grace that is secured by a deed of trust on the property as well as Chartwell's shares in CPI and its Utah gypsum mining claims. Chartwell's Form 10-KSB/A-1 at pp. 4-5 of 48. All principal and accrued interest on this loan is due and payable November 1, 2007. Id. Chartwell subsequently transferred this real estate ­ through only a quitclaim deed ­ to Kingsley in the January 2005 transaction. Chartwell's Form 8-K at p. 4 of 5; Jones Affidavit ¶ 5, and Exhibit A thereto. CPI provides no documentary evidence to establish that Kingsley's mining claims are not already pledged as security for a lien on the real estate that Chartwell transferred to Kingsley.

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Finally, although CPI asserts that Kingsley's mining claims have been appraised at $3.6 million to $8.7 million in present value, CPI Motion, ¶ 7; Jones Affidavit ¶ 10, this assertion is not supported by even a cursory review of the documents provided for at least three reasons: 1. The appraisal is dated June 2000. An appraisal that is over five years old

is, by definition, not a fair assessment of the "present value" of the mining claims, particularly when the SEC, presumably looking at the same appraisal in March 2005, required the value to be written down to zero. 2. Even if it were appropriate to take this outdated appraisal at face value

(and SMG has had only four business days to evaluate it), serious questions arise. The appraisal itself states the process of mining, processing and transporting the gypsum will cost $40 per ton (not including cost of capital), CPI Motion, Exhibit C to Exhibit 1 at p. 14, yet the letter upon which Ms. Jones relies appears to assert that at $40 per ton sales price the value of the gypsum would be $3.6 million. CPI Motion, Exhibit B to Exhibit 1. The numbers simply do not add up. 3. The Chartwell 10-K casts further serious doubt on the Jones Affidavit and

the appraisal that is attached to it. In paragraph 10 of the Jones Affidavit, Ms. Jones refers to a July 31, 2001 "Appraisal" and a June 2000 "mineral evaluation" and states: The most recent appraisal of the mining claims by . . . Behre Dolbear & Co. indicated the value of the claims in the range of $3.6 million to $8.7 million based on processed bagged gypsum prices of $40 to $50 per ton. A copy of the Appraisal [dated July 31, 2000] is attached as Exhibit B, and a copy of the mineral evaluation [dated June 2000] is attached as Exhibit C. -7-

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The Chartwell 10-K, however, refers to later "independent engineering assessments of the value" of the claims which were done after March 2001. Chartwell's 10-KSB/A-1 at p. 5 of 48. The Chartwell 10-K then states: [W]e have obtained other, earlier studies, that at the time of such studies, valued our mineral properties in excess of their carrying value. Because the establishment of proven reserves would require extensive studies and expensive testing and we currently have not allocated the financial resources to undertake these actions, we have not yet conducted such detailed studies. Id. Accordingly, it is at best unclear whether CPI in fact submitted to this Court the most recent appraisal or mineral evaluation, and, even if it did, the fact remains that Chartwell concedes that no study was ever undertaken extensive enough to establish proven reserves. III. ARGUMENT

CPI FAILED TO CARRY ITS BURDEN OF ESTABLISHING: (1) CIRCUMSTANCES EXCUSING POSTING OF A FULL SUPERSEDEAS BOND AND (2) THAT THE PROPOSED ALTERNATIVE SECURITY ADEQUATELY PROTECTS SMG. Federal Rule of Civil Procedure 62(d) provides that an appellant may obtain a stay pending appeal by posting a supersedeas bond. FED. R. CIV. P. 62(d). The stay is effective only when the court approves the supersedeas bond. Id. A party seeking a stay pending appeal usually must post a full security supersedeas bond for the full amount of the judgment. See Miami Intl. Realty Co. v. Paynter, 807 F.2d 871, 873 (10th Cir. 1986); see also Poplar Grove Planting and Refining Co., Inc. v. Bache Halsey Stuart, Inc., 600 F.2d 1189, 1190-91 (5th Cir. 1979); Endress + Hauser, Inc. v. Hawk Measurement Systems Pty. Ltd., 932 F. Supp. 1147, 1148 (S.D. Ind. 1996). This -8-

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requirement exists to preserve the status quo, protect the prevailing party's rights pending appeal, and protect the prevailing party against the possibility of loss resulting from the delay in execution because of an ineffectual appeal. See Poplar Grove Planting and Refining Co., Inc., 600 F.2d at 1190-91. A departure from this rule should occur only (1) in "extraordinary circumstances" where the moving party "objectively demonstrate[s] the reasons for such a departure," and (2) where alternative means of securing the prevailing party's interest are available. See S.E.C. v. Yun, 208 F. Supp. 2d 1279, 1282-83 (M.D. Fla. 2002) (citations omitted); Holland v. Law, 35 F. Supp. 2d 505, 506 (S.D. W. Va. 1999). The burden is on CPI to prove these requirements have been satisfied. See Poplar Grove Planting and Refining Co., Inc., 600 F.2d at 1191 (holding that the burden is on the moving party to objectively demonstrate the reasons for departure from the usual requirement of a full security supersedeas bond). Courts have recognized two circumstances that, if supported by objective proof, are "extraordinary" and justify a departure from the requirement that the moving party post a full security supersedeas bond in the full amount of the judgment. See Olympia Equip. Leasing Co. v. Western Union Telegraph Co., 786 F.2d 794, 796 (7th Cir. 1986); Poplar Grove Planting and Refining Co., Inc., 600 F.2d at 1191. Those two circumstances are: (1) where the judgment debtor's ability to pay the judgment is so plain that the cost of a bond would be a waste of money or (2) where the requirement would impose an undue financial burden on the judgment debtor. See Olympia Equip. Leasing Co., 786 F.2d at 796; Poplar Grove Planting and Refining Co., Inc., 600 F.2d at 1191. While CPI does not clearly articulate which circumstance it is relying upon, CPI cannot prove that either "extraordinary circumstance" exists here.

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A.

CPI has not Proven that "Extraordinary Circumstances" Exist and Justify a Departure from the Normal Rule that Requires a Full Security Supersedeas Bond. 1. CPI Cannot Prove that Its Ability to Pay SMG's Judgment Is "So Plain" that the Cost of a Bond Would be a Waste of Money.

CPI claims that it has "substantial property interests far in excess of the amount of the judgment entered in this matter . . . ." CPI Motion, ¶ 5. Yet, CPI also asserts in its Motion that it does not have the liquid financial assets to provide a cash bond, to post cash as collateral for a supersedeas bond, or to it obtain a letter of credit in the amount of the judgment from a bank. CPI Motion, ¶ 13. Since it is proffering a mining interest owned by Kingsley, its largest shareholder, as alternative security, CPI does not appear to be relying on an argument that it plainly has the ability to pay the judgment ­ even though it claims to have "substantial property interests." 2. CPI Cannot Prove that Requiring a Supersedeas Bond Would Impose an Undue Financial Burden on CPI.

CPI asserts that (1) it was unable to obtain a full security supersedeas bond from a surety because it did not have cash collateral equivalent to the amount of the bond or a letter of credit from a federally insured financial institution for the amount of the bond and (2) if SMG executed its judgment, such action could have serious financial implications for CPI and its creditors. CPI Motion, ¶¶ 4-5, 14. Such conclusory statements, however, do not objectively demonstrate any reason to depart from the requirement of a full security supersedeas bond, particularly where the latter one is unsupported by any affidavit, financial statement or other documentation.

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CPI fails to provide any facts as to what it offered to pay for a letter of credit or the security it offered to give any of the banks it approached. See Olympia Equip. Leasing Co., 786 F.2d at 800-02 (Easterbrook, J., concurring) (expressing doubt as to judgment debtor's assertion that it could not obtain a bond when its affidavit omits any mention of the price it offered to pay for a letter of credit or the security it offered to give). CPI also fails to provide any evidence as to its financial condition, other creditors, or how execution of SMG's judgment would affect CPI's financial stability. In fact, in telling fashion, CPI only asserts that execution of SMG's judgment "could" have a purported adverse effect on its business. CPI's pure speculation is ineffective proof that this situation is an extraordinary circumstance justifying departure from the requirement of a full security supersedeas bond. Finally, CPI's repeated assertions in its own SEC filings belie the unsupported contention that enforcement of the judgment will have serious financial implications for CPI. CPI has been telling its shareholders and the investing public that there will be no material effect on its financial position as a result of this lawsuit. The Court should not credit representations to the contrary. B. CPI Cannot Prove that a First Security Lien on Kingsley's Mining Interest Adequately Protects SMG. Assuming, arguendo, that CPI has proven that an extraordinary circumstance exists that would justify a departure from the ordinary requirements, CPI also has the additional burden to propose a plan for alternative security that adequately protects the judgment creditor. See Endress + Hauser, Inc., 932 F. Supp. at 1149. For the alternative security to be adequate, it must "furnish equal protection to the judgment creditor." See id. at 1150 (citing Poplar Grove -11-

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Planting and Refining Co., 600 F.2d at 1191). Because a supersedeas bond is essentially a "judgment insurance policy," any proposed alternative security must serve that same purpose. See id. at 1151. CPI again has failed to meet its burden because CPI's alternative security, a First Security Lien on Kingsley's unpatented mining claims, is insufficient to adequately protect SMG's judgment. The evidence shows that CPI has greatly exaggerated the value of Kingsley's unpatented mining claims. Chartwell could not develop nor sell the mineral claims and accordingly ­ at the behest of the SEC ­ reduced the value of the claims on its financial statements from $2,014,800 to $0. Yet, CPI wants this court to approve those same claims as adequate security for SMG's judgment. A security interest in property having no value is hardly adequate as a "judgment insurance policy" to SMG. CPI's bare assertion that Kingsley is attempting to sell its mining interest does not help its cause. CPI cites no evidence that shows Kingsley is likely to sell the mining interest, and the Chartwell 10-K, signed by Ms. Jones, in April 2005, states that it had been unsuccessful in its attempts to do so. Likewise, statements on the Chartwell 10-K and inconsistencies in the purported appraisal itself cast serious doubt on the asserted value of the alternative security interest. A court should not construe the exception to the general rule requiring a full security supersedeas bond to "permit a [judgment debtor] to post security of uncertain value in place of a full supersedeas bond." See Advanced Estimating Sys., Inc. v. Riney, 171 F.R.D. 327, 328 (S.D. Fla. 1997) (emphasis added) (holding that a copyright in a computer program is inadequate as alternative security because the court could not ascertain the value of the copyright if it were sold

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presently or the value of the copyright at the end of the appeal). In light of these serious questions, CPI's alternative security is insufficient to protect SMG's judgment. IV. CONCLUSION

For each of the foregoing reasons, SMG respectfully requests that this Court deny CPI's Motion for Approval of Supersedeas Bond and to Stay Proceedings to Enforce Judgment Pending Appeal. Dated: September 14, 2005 Respectfully submitted:

s/R. Daniel Scheid______________ LEWIS SCHEID LLC R. Daniel Scheid River Point Building 2300 Fifteenth Street, Suite 320 Denver, CO 80202 Telephone: (303) 534-5040 Facsimile: (303) 534-5039 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP Patrick J. McElhinny Dianna Snyder Karg 535 Smithfield Street Henry W. Oliver Building Pittsburgh, PA 15222 Telephone: (412) 355-6500 Facsimile: (412) 355-6501 Counsel for Plaintiff, Student Marketing Group, Inc.

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CERTIFICATE OF SERVICE I hereby certify that on this 14th day of September, 2005, I electronically filed the foregoing MEMORANDUM IN OPPOSITION TO COLLEGE PARTNERSHIP INC.'S MOTINO FOR APPROVAL OF SUPERSEDEAS BOND AND TO SAY PROCEEDINGS TO ENFORCE JUDGMENT PENDING APPEAL with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the following e-mail addresses:

Rosemary Orsini, Esquire Brian Matise, Esquire BURG, SIMPSON, ELDREDGE, HERSH, JARDINE, P.C. [email protected] [email protected]

s/Claudia Cooper

PI-1435287 v1