Free Opening Brief in Support - District Court of Delaware - Delaware

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE MAGTEN ASSET MANAGEMENT CORP. and LAW DEBENTURE TRUST COMPANY OF NEW YORK, Plaintiffs, v. NORTHWESTERN CORPORATION, Defendants. MAGTEN ASSET MANAGEMENT CORPORATION, Plaintiff, v. MICHAEL J. HANSON and ERNIE J. KINDT, Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

C.A. No. 04-1494-JJF

C.A. No. 05-499-JJF

DEFENDANTS MICHAEL J. HANSON AND ERNIE J. KINDT'S BRIEF IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT

Denise Seastone Kraft (#2778) EDWARDS ANGELL PALMER & DODGE LLP 919 North Market Street, 15th Fl. Wilmington, DE 19801 (302) 777-7770 Counsel to Michael J. Hanson and Ernie J. Kindt OF COUNSEL: Stanley T. Kaleczyc Kimberly A. Beatty BROWNING, KALECZYC, BERRY & HOVEN, P.C. 139 North Last Chance Gulch Helena, MT 59624 (406) 443-6820 November 30, 2007

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TABLE OF CONTENTS Pages TABLE OF CONTENTS................................................................................................................. i TABLE OF AUTHORITIES ......................................................................................................... iii SUMMARY OF ARGUMENT ...................................................................................................... 1 STATEMENT OF UNCONTESTED FACTS ............................................................................... 2 I. Background Discussion Of QUIPS................................................................................. 2 II. Northwestern's Acquisition Of Clark Fork..................................................................... 4 III The Transaction And Transfer Of Securities Obligations To Northwestern. ................. 5 IV. Northwestern's Disclosures Regarding QUIPS Payments. .......................................... 14 V. Magten's Acquisition Of QUIPS. ................................................................................. 14 VI. Magten's Creditor Status Allegations........................................................................... 15 VII. Magten's Expert Opinions. ........................................................................................... 16 STANDARD................................................................................................................................. 19 ARGUMENT................................................................................................................................ 20 I. MAGTEN LACKS STANDING TO SUE HANSON AND KINDT. ......................... 20 A. Magten's Allegations of Breaches of Fiduciary Duty are Derivative Claims. ......... 22 B. Magten Lacks Standing to Bring a Derivative Claim Under Montana Limited Liability Company Act Law. .................................................................................... 25 1. Asserting that Clark Fork was in the "Zone of Insolvency" Does Not Confer Standing on Magten Because a Creditor Cannot Bring a Direct Action Against Officers or Directors of a Company for Breach of Fiduciary Duty.......................... 26 2. Magten Cannot Satisfy the Contemporaneous Ownership Requirement Necessary for it to Step into the Shoes of the Members. ........................................................... 28 3. The Indenture Does not Confer Standing on Magten. .............................................. 30 II. THERE ARE NO MATERIAL FACTS IN DISPUTE WHICH SUPPORT THE BREACH OF FIDUCIARY DUTY CLAIM ASSERTED BY MAGTEN AGAINST HANSON AND KINDT............................................................................................... 31 A. Magten Cannot Meet its Burden of Proof Establishing a Claim for Breach of Fiduciary Duty. ......................................................................................................... 33 B. There Are No Material Facts in Dispute Which Would Have Caused Hanson to Conclude that NorthWestern Was Insolvent Either Before or Immediately After the Transaction................................................................................................................ 34 1. Hanson Was in Charge of the Utility Operations of NorthWestern and Was not Responsible for the Non-Utility Businesses. ............................................................ 34 2. Hanson Had Limited Knowledge About the Finances of NorthWestern and the NonUtility Businesses and What Little He Knew Should Not and Could Not Have Led Him to Conclude that the Transfer of the QUIPS Obligation to NorthWestern Would Create an Immediate Event of Default...................................................................... 35 C. There Are No Material Facts in Dispute Which Would Have Caused Kindt to Conclude that NorthWestern Was Insolvent Either Before or Immediately After the Transaction................................................................................................................ 39 1. Kindt Was the Chief Accountant for the Montana Utility Operations and Was Not Responsible For Nor Did He Have Any Knowledge of the Non-Utility Businesses. ................................................................................................................................... 39 i

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Kindt Had Virtually No Knowledge About the Finances of NorthWestern and the Non-Utility Businesses and Thus Had No Knowledge Which Should or Could have Given Him any Basis to Conclude that the Transfer of the QUIPS Obligation to NorthWestern Would Create an Immediate Event of Default. ................................. 40 D. There is no Evidence that NorthWestern was Insolvent Either Before or After the Transaction................................................................................................................ 41 E. There Are No Material Facts in Dispute Which Would Have Caused Either Hanson or Kindt to Conclude that Clark Fork Was Rendered Insolvent Immediately After the Transaction.......................................................................................................... 41 1. There Was No Reason for Either Defendant to Believe that the Assumption of the QUIPS Obligation by NorthWestern Was Invalid as a Matter of Law..................... 42 2. The Assumption of the QUIPS Obligation by NorthWestern Was and Is Valid...... 43 a. The Terms of the Relevant Documents on which Magten Bases Its Claim Expressly Permitted the Transfer of the Assets and Liabilities at Issue Here from Clark Fork to NorthWestern............................................................................................................ 43 b. Clark Fork Was Validly Released from Any Obligation to Make QUIPS Payments. ................................................................................................................................... 46 c. There is no Evidence Clark Fork was Insolvent After the Transaction and, the Solvency of Clark Fork Notwithstanding, the Issue is Moot in the Face of a Valid and Binding Assumption of the QUIPS Obligations by NorthWestern. .................. 47 III. MAGTEN'S RECOVERY OF COMPENSATORY DAMAGES IS LIMITED BY OPERATION OF MONTANA LAW. ......................................................................... 47 A. Montana Law Does Not Allow a Party to Profit From Compensatory Damages and Thus Limits the Amount of Compensatory Damages Recoverable by Magten Because Magten Cannot Collect More in Compensatory Damages Than It Spent Purchasing the QUIPS. ............................................................................................. 47 B. Magten Failed to Mitigate its Damages, and Instead Purchased a Strike Suit, Further Limiting or Precluding its Recovery of Compensatory Damages. ........................... 49 IV. THE UNDISPUTED FACTS FAIL TO PROVIDE A BASIS TO AWARD PUNITIVE DAMAGES................................................................................................................... 53 A. Plaintiff Can Prove No Set of Circumstances Indicating Actual Fraud by Hanson or Kindt. ........................................................................................................................ 54 B. Plaintiff Can Prove No Set of Circumstances Indicating Actual Malice Committed by Hanson or Kindt................................................................................................... 56 V. MAGTEN IS NOT ENTITLED TO ATTORNEYS FEES OR COSTS...................... 59 CONCLUSION............................................................................................................................. 60

2.

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TABLE OF AUTHORITIES Page(s) Cases Baker v. Carr, 369 U.S. 186 (1962).............................................................................................. 20 Borelli v. City of Reading, 532 F.2d 950 (3d Cir. 1976)............................................................... 21 Burk Ranches, Inc. v. State, 242 Mont. 300, P.2d 443 (Mont.1990) ............................................ 46 Celotex Corp. v. Catrett, 477 U.S. 317 (1986) ....................................................................... 19, 20 Drachman v. Harvey, 453 F.2d 722 (2nd Cir. 1971).................................................................... 28 Edgeworth v. First Natl. Bank of Chi., 677 F.Supp. 982 (S.D. Ind. 1988)................................... 28 Erker v. Kestner, 296 Mont. 123, 988 P.2d 1221 (1999).............................................................. 55 Franklin Mutual Funds Fee Litigation, 388 F.Supp.2d 451 (D. N.J. 2005)................................. 22 Gliko v. Perman, 331 Mont. 112, 130 P.3d 155 (2006)................................................................ 23 Harrington v. Holiday Rambler Corp., 176 Mont. 37, 575 P.2d 578 (Mont. 1978) .................... 46 In re Bank of New York Derivative Litigation, 320 F.3d 291(2nd Cir. 2003) .............................. 27 In re Holiday Mart, Inc., 715 F.2d 430 (9th Cir. 1983)................................................................. 42 In re Tower Air, Inc. 416 F.3d 229 n. 12 (3rd Cir. 2005) ............................................................. 26 Inter-Fluve v. Montana Eighteenth Jud. Dist. Ct., 2005 MT 103, 327 Mont. 14, 112 P.3d 258 ............................................................................................................................................ 26 Karmen v. Kemper Fin. Servs. Inc., 500 U.S. 90, 111 S. Ct. 1711, 114 L.Ed.2d 152 (1991)........................................................................................................................................ 22 Lazard Debt Recovery GP, LLC. v. Weinstock, 864 A.2d 955 (Del.Ch. 2004)............................ 48 Lewis v. Chiles, 719 F.2d 1044 (9th Cir. 1983) ............................................................................ 28 McPherson v. Kerr, 195 Mont. 454, 636 P.2d 852 (1981) ........................................................... 47 North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. Supr. 2007)......................................................................................................... 26 Performance Machinery Co., Inc. v. Yellowstone Mountain Club, LLC, 2007 MT 250, 339 Mont. 259, 169 P.3d 394, 403 (Mont. 2007) ..................................................................... 46 Prod. Res. Group, LLC v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. Ct. 2004).............. 23, 25, 26 Public Interest Research Group of New Jersey, Inc. v. Magnesium Elektron, Inc. (PIRG v. MEIC), 123 F.3d 111, (3d Cir. 1997).................................................................................... 21 Richland Nat'l Bank & Trust v. Swenson, 816 P.2d 1045 (Mont. 1991)...................................... 24 Satori v. S & S Trucking, Inc., 332 Mont. 503, 139 P.3d 806 (2006).................................... 55, 56 Sax v. World Wide Press, Inc., 809 F.2d 610 (9th Cir.1987).................................................. 22, 23 iii

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Schiaffo v. Helstoski, 492 F.2d 413 (3d Cir. 1974)....................................................................... 21 Silling v. Erwin, 881 F.Supp. 236 (S.D. W.Va. 1995).................................................................. 28 Spackman v. Ralph M. Parsons Co., 147 Mont. 500, 414 P.2d 918 (Mont. 1966) ................ 45, 46 Sunburst School Dist. No. 2 v. Texaco, Inc., 2007 MT 183, 338 Mont. 259, 165 P.3d 1079 (Mont. 2007 .............................................................................................................................. 46 Town Pump, Inc. v. Diteman, 191 Mont. 98, 622 P.2d 212 (Mont. 1981) ................................... 47 Trifad Entertainment, Inc. v. Anderson, 2001 MT 227, 306 Mont. 499, 36 P.3d 363. ......... 53, 54 Warth v. Seldin, 422 U.S. 490 (1975) ........................................................................................... 20 Statutes Mont. Code Ann. § 27-1-221(1) ................................................................................................... 50 Mont. Code Ann. § 27-1-221(2) ................................................................................................... 53 Mont. Code Ann. § 27-1-221(3) ................................................................................................... 51 Mont. Code Ann. § 27-1-221(4) ................................................................................................... 51 Mont. Code Ann. § 27-1-221(5) ................................................................................................... 50 Mont. Code Ann. § 35-8-1104.................................................................................... 24, 26, 27, 29 Mont. Code Ann. § 35-8-1104(2) ................................................................................................. 27 Mont. Code Ann. § 35-8-310........................................................................................................ 31 Mont. Code Ann. § 35-8-310(2) ................................................................................................... 31 Mont. Code Ann. § 35-8-310(8) ................................................................................................... 32 Mont. Code Ann. §35-8-310(3) .................................................................................................... 31 Other Authorities 12B W, Fletcher, Cyclopedia of the Law of Private Corporations. § 5911 (rev. perm. Ed. 1984) ................................................................................................................................... 22, 23 7C Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, FEDERAL PRACTICE AND PROCEDURE § 1828 (2d Ed.1986) ............................................................................................. 27 Rules Fed R. Civ. P. 23.1........................................................................................................................ 27 Fed. R. Civ. P. 56(c) ..................................................................................................................... 19

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Defendants Michael J. Hanson ("Hanson") and Ernie J. Kindt ("Kindt") (collectively, "Defendants"), by and through their counsel of record, hereby submit their Brief in Support of Motion for Summary Judgment. SUMMARY OF ARGUMENT The core allegation in Magten's Complaint is that Hanson and Kindt, as officers of Clark Fork, assisted NorthWestern in a transaction that Magten alleges was a fraudulent transfer of assets from Clark Fork to NorthWestern (the "Transaction"). Magten's breach of fiduciary duty claim must be dismissed because Magten lacks standing to bring this derivative claim on behalf of Clark Fork and Blackfoot, LLC ("Clark Fork")1 because Magten was not a member or creditor of Clark Fork at the time the Transaction took place. It is undisputed that Magten is not now, and never has been, a member of Clark Fork. Statement of Uncontested Facts2 ("Uncontested Facts") 10, 34, 48, 49. Further, Magten admitted that it did not acquire any QUIPS until well after the transaction at issue here had occurred. Uncontested Facts 58, 60, 62 ­ 65. Finally, Judge Case, the Delaware Bankruptcy Court Judge, has already held, and Magten has not disputed, that it has never been a creditor of Clark Fork. Uncontested Fact 65; see also Beatty Aff. Exh3. 31. Plaintiff's reliance on one provision in the Indenture to confer legal standing on Plaintiff to bring this action is misplaced. As discussed below, Plaintiff's theory is a meritless attempt to circumvent the legal standing requirements and the prohibition on purchasing grievances. Further, the uncontested facts do not give Magten a cause of action for alleged breach of fiduciary duty for which relief may be granted since: (1) there is no evidence that either Defendant knew or should have known that NorthWestern was unable to meet the obligations which it assumed upon the transfer of the assets and liabilities; and, in fact, NorthWestern did

1

On or about February 14, 2002, NorthWestern Corporation acquired the membership interest in Montana Power, LLC. Montana Power, LLC was later re-named NorthWestern Energy, LLC, and then again re-named Clark Fork and Blackfoot, LLC. Throughout this brief, for the easy reference of this Court, Defendants refer to this entity as "Clark Fork" regardless of its actual legal name at the time. 2 Defendants' Statement of Uncontested Facts appears immediately following this Summary of Argument. 3 References to "Beatty Aff. Exh. ___" are references to exhibits attached to the Affidavit of Kimberly A. Beatty submitted in support of this Motion and Brief.

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meet those obligations and no event of default occurred until ten months after the transfer was completed; (2) there is no evidence that NorthWestern was insolvent or in the zone of insolvency either before or after the Transaction; and (3) there is no evidence that Clark Fork was insolvent after the Transaction since the assumption of the QUIPS obligations by NorthWestern and the release of Clark Fork to pay the QUIPS obligations were valid and has been so determined by a court of competent jurisdiction. See generally, Statement of Uncontested Facts, infra. Magten's damages are significantly limited, if any award is permitted at all. Magten began to purchase QUIPS only after NorthWestern had announced that it might not be able to continue to pay on the QUIPS, and continued to purchase QUIPS after NorthWestern exercised its contractual rights to suspend payments due under the QUIPS, and still continued to purchase QUIPS even after NorthWestern filed a petition in bankruptcy, which was an event on default of the QUIPS obligations. Uncontested Facts 58-63. Because Magten clearly and intentionally purchased a strike suit, see Uncontested Fact 62, it is precluded from, or at best limited, in any recovery of compensatory damages. There is no evidence that the Defendants acted in a fraudulent or malicious manner and thus as a matter of law Magten is not entitled to punitive damages. See generally, Statement of Uncontested Facts, infra. Finally, as a matter of law, Magten is not entitled to recover its attorneys fees or costs. STATEMENT OF UNCONTESTED FACTS Defendants' Statement of Uncontested Facts is as follows: I. Background Discussion Of QUIPS. 1. In November 1996, The Montana Power Company ("MPC") and the Bank of

New York entered into an Indenture for Unsecured Subordinated Debt Securities Relating to Trust Securities (the "Indenture"). See Complaint, ¶ 11, Beatty Aff. Exh. 3, 29. 2. Pursuant to the Indenture, MPC issued certain Junior Subordinated Interest All of the Junior Debentures were purchased by a

Debentures (the "Junior Debentures").

Delaware business trust, Montana Power Capital I (the "Trust"). See Complaint, ¶¶ 12-16, 2

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Beatty Aff. Exh. 29. The Trust was created for the sole purpose of issuing trust securities and investing proceeds in the Junior Debentures. MPC was to be the owner of all of the beneficial interests represented by common securities of the Trust. See Scherf Report, p. 54; see also Montana Power Capital I 8.45% Cumulative Quarterly Income Preferred Securities, Series A Prospectus ("QUIPS Prospectus"), p. i, Beatty Aff. Exh. 1 3. Following the issuance of the Junior Debentures, the Trust issued the 2,600,000

40-year preferred securities, called Cumulative Quarterly Income Preferred Securities, Series A (the "QUIPS"). See Scherf Report, p. 5. 4. including: a. MPC's obligations under the Junior Debentures and therefore MPC's obligations to make QUIPS payments are "unsecured, subordinated and junior in right of payment to Senior Indentures of [MPC]; b. So long as an "Event of Default" had not occurred, MPC had the right to defer payments of interest on the Junior Debentures and the QUIPS for up to 20 consecutive quarters; c. The Guarantee contained in the Indenture did not entitle QUIPS holders to seek accrued and unpaid distributions from MPC as the Guarantee was an unsecured obligation of MPC and ranked subordinate and junior to all Senior Indebtedness of MPC; d. Upon the occurrence of certain "Special Events," MPC could cause a mandatory redemption of the QUIPS at a stated "Redemption Price"; e. MPC retained the right to terminate the Trust at any time and cause the Junior Debentures to be distributed to the holders of the Trust's securities and such The QUIPS Prospectus described several risks associated with the QUIPS,

4

The Scherf Report is the Expert Report of Stephen Scherf attached to the Affidavit of Mr. Scherf submitted in this action and in support of Defendants' Motion for Summary Judgment.

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distributed securities may trade at a discount to the price paid by the holder of the QUIPS; f. The QUIPS holders would have limited voting rights relating only to the modification of the QUIPS and the direction of remedies upon the occurrence of an Event of Default under the Trust Agreement; and g. While the QUIPS were approved for listing on the NYSE, they may trade at a price that does not reflect the value of accrued but unpaid interest with respect to the Junior Debentures. See QUIPS Prospectus, pp. 3-5, Beatty Aff. Exh. 1. II. Northwestern's Acquisition Of Clark Fork. 5. On or about September 28, 2000, The Montana Power Company created a wholly

owned subsidiary, the Montana Power, LLC ("MPLLC"), by filing its Articles of Organization with the Montana Secretary of State. See Articles of Organization of the Montana Power, LLC, Beatty Aff. Exh. 6. 6. On or about September 29, 2000, NorthWestern Corporation ("NorthWestern")

agreed to acquire certain transmission and distribution energy assets and liabilities from MPC by purchasing the unit interest in MPLLC. See Unit Purchase Agreement, dated September 29, 2000, Beatty Aff. Exh. 7. 7. In January 2002, NorthWestern attained approval from the Montana Public

Service Commission ("MPSC") to acquire the assets and liabilities of MPLLC. The MPSC authorized NorthWestern to hold MPLLC as either a subsidiary or division of NorthWestern. See Montana Public Service Commission Final Order No. 6353c, Docket No. D2001.1.5 (January 31, 2002) , Beatty Aff. Exh. 8. 8. On or about February 13, 2002, MPC transferred these assets and liabilities to be

acquired by NorthWestern into, MPLLC. See Complaint, ¶ 23, Beatty Aff. Exh. 29.

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9.

MPLLC was later renamed NorthWestern Energy, LLC and was subsequently

renamed Clark Fork and Blackfoot, LLC ("Clark Fork").5 See Complaint, ¶ 1, Beatty Aff. Exh. 29. 10. Pursuant to the Unit Purchase Agreement, on February 15, 2002, NorthWestern

purchased 100% of the equity or the "unit interest" of Clark Fork for $478 million and assumed approximately $511 million of liabilities. See NorthWestern Form 10-K for the period December 31, 2002, p. 5, Beatty Aff. Exh. 24; Hanson Depo., p. 15, ln. 15 ­ p. 16, ln. 8, Beatty Aff. Exh. 34. III The Transaction And Transfer Of Securities Obligations To Northwestern. 11. On or about August 7, 2002, the Board of Directors of NorthWestern, the sole

Member and Manager of Clark Fork, passed resolutions authorizing NorthWestern to guarantee payment of the QUIPS obligations and authorizing the transfer of substantially all of the assets and liabilities of Clark Fork's Montana utility business to NorthWestern. See NorthWestern Corporation Board of Directors Minutes of Regular Meeting August 7, 2002, Beatty Aff. Exh. 10. 12. Also on August 7, 2002, NorthWestern, as the sole member and manager of Clark

Fork, executed a Written Consent of Sole Member to Action in Lieu of Meeting, containing, among others, the following resolutions: NOW, THEREFORE, BE IT RESOLVED that the Manager [NorthWestern] hereby authorizes, empowers and directs the officers of [Clark Fork], or any of them, to execute and deliver an asset and stock transfer agreement to be entered into between [Clark Fork] and the Manager (the "Transfer Agreement"), to effect the NWE Asset Transfer, as well as any agreements, instruments, or documents contemplated thereby or in connection therewith ("Ancillary Agreements"), as the proper officers of the Corporation deem necessary or desirable, with such modifications or amendments thereto as such officers shall approve and the execution of such Transfer Agreement and Ancillary Agreements shall be deemed conclusive evidence of such approval.

5

For purposes of convenience, all references to MPLLC, NorthWestern Energy, LLC and Clark Fork will be made as Clark Fork.

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FURTHER RESOLVED, that any and all actions taken by any officer or employee or agent of [Clark Fork] in furtherance of the foregoing resolutions and within the authority conferred by the foregoing resolutions are hereby ratified and approved in all respects. See NorthWestern Energy, L.L.C. Written Consent of Sole Member to Action in Lieu of Meeting, dated August 7, 2002, (emphasis added), Beatty Aff. Exh. 9. 13. On or about August 13, 2002, NorthWestern, Clark Fork, and the Trustee

executed a Second Supplemental Indenture and an Amendment to Guarantee Agreement. These agreements expressly reserved the right of Clark Fork to transfer substantially all of its assets and liabilities to NorthWestern, thereby relieving Clark Fork of "its obligations under the QUIPS Debenture, the Indenture and hereunder as provided in Article Eleven of the Indenture." See Second Supplemental Indenture, § 201, Beatty Aff. Exh. 11; Amendment to Guarantee Agreement, Beatty Aff. Exh. 12; see also Indenture for Unsecured Subordinated Debt Securities Relating to Trust Securities, § 1101, Beatty Aff. Exh. 13. 14. On November 15, 2002, Clark Fork and NorthWestern entered into an Asset and

Stock Transfer Agreement. Pursuant to the terms of the agreement, Clark Fork transferred the majority of its assets (the "Transferred Assets") and designated liabilities to NorthWestern (the "Transaction"). Excluded from the Transaction were Clark Fork's assets and insurance policies relating to the Milltown Dam as well as a parcel of property located in Missoula County, Montana. Also excluded from the Transaction were certain liabilities, including environmental liabilities associated with the Milltown Dam and liabilities and obligations relating to certain pending and potential litigation. See Asset and Stock Transfer Agreement, Beatty Aff. Exh. 15. 15. Clark Fork was solvent prior to the Transaction occurring. See Scherf Report, p.

10; see also Plaintiff's Complaint, ¶¶ 33-35, Beatty Aff. Exh. 29; see also Marcus Depo., p. 176, ln. 5 ­ p. 177, ln. 20, Beatty Aff. Exh. 42. 16. NorthWestern was solvent both prior to and after November 15, 2007 under

Generally Accepted Accounting Principles ("GAAP"). See Scherf Report, p. 12, discussing Berliner Report, Appendix A-4.

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17.

NorthWestern had adequate liquidity throughout 2002 and into 2003. See Expert

Report of Christopher J. Kearns, pp. 3-4, Beatty Aff. Exh. 40; see also Marcus Depo., p. 137, ln. 19 ­ p. 140, ln. 10 ("Looking briefly at [the Expert Report of Christopher J. Kearns], as I've done just now, I'm not sure I understand what his point is about actually having adequate liquidity in 2002-2003. We all knew [NorthWestern] had that even with all the misinformation in the marketplace."), Beatty Aff. Exh. 42. 18. The Asset and Stock Transfer Agreement provided, in relevant part:

[NorthWestern agrees] to assume on the Closing Date [November 15, 2002], and to pay or perform, in accordance with their terms, any and all obligations and liabilities of the Transferor [Clark Fork, f/k/a NorthWestern Energy, LLC], direct or indirect, known or unknown, absolute or contingent, arising or relating to the period before the Closing, except the Excluded Liabilities. The Excluded Liabilities set forth in the Asset and Stock Transfer Agreement did not include the obligations under the QUIPS. Asset and Stock Transfer Agreement, p. 5, Beatty Aff. Exh. 15. 19. Concurrently with the Asset and Stock Transfer Agreement, NorthWestern and

Clark Fork executed several agreements requiring NorthWestern to provide funds to Clark Fork. Specifically, NorthWestern and Clark Fork signed a Maintenance and Operating Costs Support Agreement, Beatty Aff. Exh. 16, and an Environmental Liabilities and Support Agreement, Beatty Aff. Exh. 17, (collectively, the "Support Agreements"). 20. Pursuant to the Environmental Liabilities Support Agreement, NorthWestern

agreed to provide sufficient capital to ensure Clark Fork had, at all times, a net worth, as determined in accordance with the Generally Accepted Accounting Principles, of at least $1,000. See, Environmental Support Agreement, p. 1, Beatty Aff. Exh. 17. 21. Other documents executed concurrently with the Asset and Stock Transfer

Agreement included a Notice to the Trustee, Bank of New York, of the Transaction, Beatty Aff. Exh. 22, a Third Supplemental Indenture under the terms of which NorthWestern expressly assumed the obligations to make the QUIPS payments pursuant to the Indenture, Beatty Aff. Exh. 19, an Agreement between Clark Fork and NorthWestern under the terms of which 7

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NorthWestern assumed the Guarantee of payment of the QUIPS, Beatty Aff. Exh. 20, and an Agreement between those same entities under which NorthWestern assumed the obligation to make all payments with respect to the QUIPS, Beatty Aff. Exh. 21. 22. At the time of the Transaction, Michael Hanson served as Clark Fork's President

and Chief Executive Officer. Hanson was also the President and Chief Executive Officer of NorthWestern Public Service Division, a division of NorthWestern responsible for overseeing NorthWestern's utility operations in Montana, South Dakota and Nebraska. See Hanson Depo., p. 25, ln. 7 ­ p. 32, ln. 3, Beatty Aff. Exh. 34; see also Officer's Certificate, dated November 15, 2002, Beatty Aff. Exh. 34. 23. Mr. Hanson did not manage NorthWestern's non-utility businesses, including

Expanets, and did not know the details of those businesses' financing. See Hanson Depo. p. 121, ln. 4 ­ p. 124, ln. 12, Beatty Aff. Exh. 34. 24. Mr. Hanson was aware during 2002 that Expanets was having certain problems,

but was repeatedly informed Expanets was working to fix these problems. Each time a problem was discussed, there was a discussion of actions which were going to be taken to fix the problem and constant assurances Expanets was going to improve. See Hanson Depo. p. 112, lns. 12 ­ 23; p. 119, ln. 20 ­ p. 120, ln. 13; p. 140, ln. 15 ­ p. 141, ln. 8, Beatty Aff. Exh. 34. 25. Between December 2001 and November 2002, Mr. Hanson received periodic

Management Financial and Information Reports ("MFIRs") and attended certain meetings at which the various businesses of NorthWestern were discussed. However, these MFIRs provided only selective information about each of the operating companies and did not contain balance sheets, income statements or statements of cash flow for any of NorthWestern's operating companies. See Hanson Depo., p. 41, ln. 11 ­ p. 45, ln. 17, Beatty Aff. Exh. 34; see also Scherf Report, p. 17. 26. While the MFIRs for May, June and July 2002 contained charts indicating that

Expanets' experienced some delays in repaying cash advances previously made by NorthWestern, the MFIRs contained only selected financial information and did not contain 8

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sufficient information for the reader to conclude that NorthWestern would have been unable to make QUIPS payments after November 2002 or that Expanets would never be able to repay its parent. See Hanson Depo., p. 123, ln. 19 ­ p. 124, ln. 12, Beatty Aff. Exh. 34; see also Scherf Report, pp. 16-18. 27. In his capacity as CEO of Clark Fork, Mr. Hanson executed certain Officer's

Certificates relating to the Transaction. See Hanson Depo., p. 223, ln. 16 ­ p. 230, ln. 17. 28. First, in August 2002, Mr. Hanson executed an Officer's Certificate Pursuant to

Section 102 of the Indenture. In relevant part, Mr. Hanson certified that all conditions precedent provided in the Indenture relating to the execution and delivery of the Second Supplement Indenture had been complied with. See Officer's Certificate Pursuant to Section 102 of the Indenture, dated August 2002, Beatty Aff. Exh. 13. 29. Second, on November 15, 2002, Mr. Hanson executed a second Officer's

Certificate relating to the Transaction. In this Certificate, Mr. Hanson certified that the Transaction complied with Article 11 of the Indenture and all conditions precedent in the Indenture as they related to the Transaction had been complied with. Specifically, the Certificate made two limited representations: (1) the transfer of the assets and liabilities was to a corporation (NorthWestern) duly existing under the laws of the United States; and (2) the transfer would not create an immediate event of default with respect to the obligations, including the QUIPS obligations. See Officer's Certificate, dated November 15, 2002, (emphasis added) Beatty Aff. Exh. 18. 30. As the Trustee for the Indenture, the Bank of New York was responsible for

supporting the requirements under the Indenture. In its role as Trustee and in executing the Third Supplemental Indenture, the Bank of New York relied on Officer's Certificates from the issuer pursuant to the Indenture. Bank of New York does not, however, review financial statements of the issuer. See Indenture, generally, Beatty Aff. Exh. 3; see also Lewicki Depo., p. 12, ln. 13 ­ p. 13, ln. 6; p. 14, ln. 7 ­ p. 15, ln. 14; p. 57, ln. 17 ­ p. 58, ln. 10, Beatty Aff. Exh. 33. 9

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31.

In executing such officer's certificates, Mr. Hanson relied on Management

Information Reports, SEC filings, other public financial statements, and presentations to NorthWestern's board. Mr. Hanson "had no basis for believing that [the documents he relied upon] were false or misleading." See Hanson Depo., p. 223, ln. 16 ­ p. 230, ln. 17; p. 272, ln. 10 ­ p. 280, ln 19; p. 285, lns. 6-15; p. 283, lns. 1-13 ("My testimony is that upon signing these documents, I did not know [the 2002 10-Qs were false or misleading] nor did I have any basis to know or believe that to be the case."), Beatty Aff. Exh.34. 32. Hanson further relied on the management of NorthWestern and on officers of its

subsidiaries regarding any perceived financial problems with NorthWestern or its related companies. See Hanson Depo., p. 112, lns. 12 ­ 23; p. 116, ln. 10 ­ p. 118, ln. 8; p. 123, ln. 25 ­ p. 124, ln. 12; p. 223, ln. 16 ­ p. 230, ln. 17; p. 272, ln. 10 ­ p. 280, ln 19, Beatty Aff. Exh. 34. 33. Based on his involvement with NorthWestern and his general understanding,

Hanson had no reason to question either the advisability of the Transaction or the ability of NorthWestern to pay the QUIPS obligations. See Hanson Depo., p. 65, lns. 2 ­ 20; p. 274, lns. 819, Beatty Aff. Exh. 34; see also Scherf Report, p. 23. 34. Concerning the Transaction, Mr. Hanson followed the directive of NorthWestern

to transfer substantially all of the assets and liabilities of Clark Fork to NorthWestern. According to Mr. Hanson, "[NorthWestern] owned them both. There was no change. [NorthWestern] owned the equity of [Clark Fork] before the transaction. They owned it after the transaction." See Hanson Depo., p. 275, ln. 23 ­ p. 276, ln. 23, Beatty Aff. Exh. 34; see also NorthWestern Energy, L.L.C. Written Consent of Sole Member to Action in Lieu of Meeting, dated August 7, 2002, Beatty Aff. Exh. 9. 35. At the time of the Transaction, Ernie Kindt served as Clark Fork's Vice President

and Chief Accounting Officer. As an officer of Clark Fork, Mr. Kindt was responsible for ensuring filing requirements with certain debt holders were completed on time. Mr. Kindt's responsibilities were limited to the Montana utility assets owned by Clark Fork. See Kindt

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Depo., p. 15, ln. 11 ­ p. 19, ln. 10, Beatty Aff. Exh. 35; see also NorthWestern Energy, L.L.C. Resolution of Managing Member, dated November 5, 2002, Beatty Aff. Exh. 14. 36. During the summer of 2002, Mr. Kindt became Clark Fork's contact for the

Trustee, the Bank of New York, with respect to the QUIPS. Mr. Kindt had only one or two phone calls with the Trustee prior to the Transaction. These communications related to interest payments and to the annual filing. See Kindt Depo., p. 22, ln. 18 ­ p. 23, ln. 7; p. 70, ln. 2 ­ p. 71, ln. 6; p. 83, lns. 6-9, Beatty Aff. Exh. 35. 37. Mr. Kindt was neither involved in the decision to consummate the Transaction

nor did he have access to information which would provide a basis for opining on the advisability of the Transaction. See Kindt Depo., p. 18, ln. 1 ­ p. 19 ln. 10; p. 23, lns. 8-11, Beatty Aff. Exh. 35; see also Scherf Report, pp. 14-15. 38. Mr. Kindt did not review NorthWestern's financial statements or public financial

disclosures in connection with the Transaction. See Kindt Depo., p. 31, lns. 1-6; p. 32, lns. 9-13, Beatty Aff. Exh. 35. 39. Mr. Kindt did not receive financial statements of NorthWestern's other divisions

or subsidiaries and had limited information regarding the net income of these entities. See Kindt Depo., p. 50, lns. 17-19; p. 72, lns. 4-23, Beatty Aff. Exh. 35. 40. Mr. Kindt did not see any Management Financial and Information Reports

produced by NorthWestern. See Kindt Depo., p. 50, lns. 17-19, Beatty Aff. Exh. 35. 41. Mr. Kindt did not discuss with anyone at NorthWestern or with Mr. Hanson the

company's ability to service the QUIPS debt after the Transaction. See Kindt Depo., p. 31, ln. 25 ­ p. 32, ln. 22, Beatty Aff. Exh. 35. 42. In 2002, shortly after NorthWestern acquired the unit interest of Clark Fork, Mr.

Kindt attended one NorthWestern meeting attended by all of the Montana vice presidents and the presidents of NorthWestern's various divisions and subsidiaries. At that meeting, the division and subsidiary presidents each spent ten to fifteen minutes updating the attendees on their

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progress. "Expanets was confident they would meet their annual budgeted target which they indicated was an aggressive target." See Kindt Depo., p. 72, lns. 4-16, Beatty Aff. Exh. 35. 43. The only information Mr. Kindt had regarding Expanets was from the single

meeting he attended and from a one-line comparison of Expanets' net income compared to their budget for each month and for the year-to-date contained in the NorthWestern utility financial statements. Mr. Kindt never reviewed any financial statements for Expanets. See Kindt Depo., p. 72, lns. 1-25, Beatty Aff. Exh. 35. 44. At the time of the Transaction, Kindt believed NorthWestern had the "financial

wherewithal to continue to service the [QUIPS] debt" and that "whenever the utility needed cash, it was available." Kindt had no concerns with respect to whether NorthWestern could satisfy the QUIPS obligations as "[t]he balance sheet of NorthWestern was strong" and "[t]he company had just recently issued some debt and did not have a difficult time issuing that debt." Further, Kindt was not aware of any concerns with respect to NorthWestern's liquidity or cash flows until the late winter or early spring of 2003. Kindt Depo., p. 31, lns. 7-19; p. 32, lns. 19-22; p. 63, lns. 8-14; p. 86, ln. 17 ­ p. 87, ln. 2, Beatty Aff. Exh. 35. 45. Mr. Kindt believed there was "no need for concern" regarding Clark Fork's cash

flows after the Transaction due to the Support Agreements guaranteeing sufficient cash flows to Clark Fork from NorthWestern. Concerning the Transaction, Mr. Kindt believed "NorthWestern was the owner of the assets and that all [NorthWestern] was doing was changing the form of that ownership from ownership of [Clark Fork] to direct ownership of the net assets." See Kindt Depo., p. 40, lns. 3-9; p. 45, lns. 8-23; p. 47, lns. 12-21 Beatty Aff. Exh. 35. 46. Mr. Kindt's only roles in the Transaction were to adjust company codes for the

assets and transmit certain paperwork relating to the debt, including the Notice to the Trustee, Bank of New York, of the Transaction. There "wasn't a whole lot of activity that was required on the [Clark Fork] books." See Kindt Depo., p. 18, ln. 1 ­ p. 20, ln. 15, Beatty Aff. Exh. 35. 47. Two internal investigations by NorthWestern's Board of Directors and a separate

investigation by the SEC revealed no improper activity on the part of either Mr. Hanson or Mr. 12

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Kindt. See Affidavit of Michael Hanson; Affidavit of Ernie Kindt; see also Scherf Report, pp. 24-26. 48. At the time of the Transaction, NorthWestern was the sole member and manager

of Clark Fork. See Limited Liability Company Operating Agreement of Montana Power Company L.L.C., Beatty Aff. Exh. 5; see also Written Consent of Sole Member and Manager to Action in Lieu of Meeting, dated August 7, 2002, Beatty Aff. Exh. 9; see also NorthWestern Form 10-K for the period ending December 31, 2002, p. 5 filed April 15, 2003, Beatty Aff. Exh. 24. 49. The Operating Agreement for Clark Fork, provides that the company shall be

managed by its sole Member. See Limited Liability Company Operating Agreement of Montana Power L.L.C., Beatty Aff. Exh. 5. 50. Following the Transaction, NorthWestern made two (2) quarterly payments on the

QUIPS, in December 2002 and March 2003. After making these two quarterly payments, in May 2003 NorthWestern exercised its contractual right to defer future quarterly payments on the QUIPS. Such a deferral was allowed by the Indenture and did not constitute an Event of Default. See NorthWestern Form 8-K, dated May 23, 2003, Beatty Aff. Exh. 27; see also Indenture, § 301, 312, Beatty Aff. Exh. 3. 51. NorthWestern never defaulted on its obligation to make QUIPS payments until it

filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 14, 2003. See Indenture, Article Eight; see also NorthWestern Form 8-K, dated September 15, 2003, Beatty Aff. Exh. 28. 52. On December 13, 2002, NorthWestern issued a Form 8-K indicating that it might

have to restate its public financial disclosures for 2002. As of this time, NorthWestern's auditors had not determined the magnitude of any restatement which might be required. See NorthWestern Form 8-K, dated December 13, 2002, Beatty Aff. Exh. 23.

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IV.

Northwestern's Disclosures Regarding QUIPS Payments. 53. On April 16, 2003, NorthWestern filed with the SEC amended quarterly reports,

Forms 10-Q/A for the period ending March 31, 2002, June 30, 2002, and September 30, 2002. NorthWestern also filed its Form 10-K, Annual Report, and a Form 8-K on that date. See NorthWestern Form 8-K, dated April 16, 2003, Beatty Aff. Exh. 25. 54. The Form 8-K filed on April 16, 2003 also stated NorthWestern had the right to

defer interest payment for up to 20 consecutive quarters and that NorthWestern may not be able to meet its debt obligations. See NorthWestern Form 8-K, dated April 16, 2003, Beatty Aff. Exh. 25. 55. On May 15, 2003, NorthWestern filed with the SEC a Form 8-K indicating,

among other information, NorthWestern was considering deferring QUIPS payments and that it is "likely that such payments will be deferred." See NorthWestern Form 8-K, dated May 15, 2003, Beatty Aff. Exh. 26. 56. On May 23, 2003, NorthWestern filed a Form 8-K announcing that its "Board of

Directors has elected to defer interest payments on the subordinated debentures of all series of its trust preferred securities [QUIPS]." See NorthWestern Form 8-K, dated May 23, 2003, Beatty Aff. Exh. 27. 57. The liabilities transferred from MPC to Clark Fork and then from Clark Fork to

NorthWestern included the Junior Debentures issued by MPC and held by the Trust. See Complaint, ¶¶ 16, 23, 31, Beatty Aff. Exh. 29. V. Magten's Acquisition Of QUIPS. 58. Magten first acquired a beneficial interest in the Junior Debentures by purchasing

the QUIPS issued by the Trust beginning on or about April 30, 2003, approximately five months after the Transaction and exactly two weeks after NorthWestern restated its financials for three quarters of 2002. See Complaint, ¶¶ 15-19, Beatty Aff. Exh. 29; see also Embry Depo., p. 14, lns. 19-22, p. 40 lns. 11-14 (Q: "Were you an investor in the QUIP's [sic] in 2002? And when I

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say you, Magten on behalf of its clients. A: No."), Beatty Aff. Exh. 36; see also Magten Asset Management Corp., Inc. Master Summary of Holdings as of 7/24/04, Beatty Aff. Exh. 30. 59. Prior to purchasing the QUIPS, Magten reviewed all financial information that

was available relating to NorthWestern and Montana Power Company, including Form 10-Qs and 10-Ks from 2002 as well as restated financial filings. Magten also reviewed the Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture and the Assumption Agreement. See Embry Depo., p. 16, ln. 24 ­ p. 21, ln. 25, Beatty Aff. Exh. 36. 60. Magten purchased additional QUIPS on May 12, 2003, June 3, 2003 and various

dates throughout the remainder of 2003. See Magten Asset Management Corp., Inc. Master Summary of Holdings as of 7/24/04, Beatty Aff. Exh. 30; see also Embry Depo., p. 91, lns. 3-7, Beatty Aff. Exh. 36. 61. Magten knew NorthWestern was in bankruptcy the day it filed its petition. See

Embry Depo., p. 94, lns. 18-20, Beatty Aff. Exh. 36. 62. Magten continued to purchase additional QUIPS after NorthWestern filed for

bankruptcy protection in September 2003. Mr. Embry, Magten's sole director and officer, believed the QUIPS purchases while NorthWestern was in bankruptcy was a "good investment" "[b]ecause [NorthWestern] had engaged in a fraud which had -- which gave rise to a fraudulent conveyance claim, which the securities represent a claim on." See Embry Depo., p. 94, lns. 9-19, Beatty Aff. Exh. 36; see also Magten Asset Management Corp., Inc. Master Summary of Holdings as of 7/24/04, Beatty Aff. Exh. 30. 63. Magten continued to acquire QUIPS until approximately May of 2006. Magten's

last purchase of the QUIPS was for $15.00 per security. See Embry Depo., p. 116, lns. 6-17; p. 136, ln. 21 ­ p. 137, ln. 9, Beatty Aff. Exh. 36. VI. Magten's Creditor Status Allegations. 64. Magten does not allege in the Complaint that it was a creditor of Clark Fork or

owned any QUIPS prior to or at the time the Transaction occurred. See generally Complaint, Beatty Aff. Exh. 29. 15

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65.

In the NorthWestern bankruptcy, the United States Bankruptcy Court for the

District of Delaware found: The Debtor has consistently alleged, and Magten has never disputed, that Magten did not own any of the debentures prior to the time the assets were transferred to the Debtor. Rather, Magten required the assets after the transaction was complete. Therefore, the Debtor asserts and Magten has not disputed, that Magten was never a creditor of Clark Fork at a time when Clark Fork held the disputed energy assets. Rather, Magten became a holder of the debentures only after the transaction was completed and was a matter of public record. In re NorthWestern Corp., No. 03-12872 (CGC), 2004 WL 1661016, at *1 (Bankr. D. Del. July 23, 2004), Beatty Aff. Exh. 31. 66. Exh. 29. 67. Neither Hanson nor Kindt received any of the assets transferred from Clark Fork Magten owns in excess of 33% of the QUIPS. See Complaint, ¶ 13, Beatty Aff.

to NorthWestern. See Complaint, ¶ 31, Beatty Aff. Exh. 29. 68. Plaintiff's Complaint contains one claim against Mr. Hanson and Mr. Kindt.

Plaintiff's sole count is a direct claim for breach of fiduciary duty based on transferring assets when the company was insolvent or in the zone of insolvency. See generally, Complaint, and ¶ 47, Beatty Aff. Exh. 29. VII. Magten's Expert Opinions. 69. Magten has retained two experts in this matter ­ Robert Berliner and Paul Marcus

­ both of whom have provided expert reports. Plaintiff's experts express no opinion as to whether NorthWestern was insolvent or in the zone of insolvency prior to or after the Transaction nor were Plaintiff's experts asked to opine on these issues, although these issues form the basis of Plaintiff's one count breach of fiduciary duty claim. In fact, Mr. Berliner testified he was "delighted" at not being asked to opine on NorthWestern's solvency. See Berliner Depo., p. 26, ln. 5 ­ p. 32, ln. 3, Beatty Aff. Exh. 41; see Marcus Depo., p. 17, ln. 19 ­ p. 19, ln. 14, Beatty Aff. Exh. 42.

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70.

Plaintiff's experts express no opinion as to whether Clark Fork remained liable for

the QUIPS obligations after the Transaction. However, both of Plaintiff's experts were expressly instructed to assume Clark Fork remained liable for the QUIPS obligations after the Transaction. See Berliner Depo., p. 28, ln. 5 ­ p. 32, ln. 3, Beatty Aff. Exh. 41; see Marcus Depo., p. 191, ln. 21 ­ p. 192, ln. 25, Beatty Aff. Exh. 42. Absent the assumption which Magten's counsel directed them to make, they had no opinion concerning the solvency of Clark Fork after the Transaction, see Berliner Depo. p. 138 ­ 139, ln. 18, Beatty Aff. Exh. 41; see Marcus Depo. p. 137, ln. 2-14, Beatty Aff. Exh. 42. 71. Plaintiff's expert, Robert Berliner, and his company spent approximately 3,100

hours over a ten-month period reviewing the documents relating to Magten's cases against Hanson and Kindt and NorthWestern and generating Mr. Berliner's expert report. See Berliner Depo., p. 140, ln. 18 ­ p. 142, ln. 8, Beatty Aff. Exh. 41. In his report, Mr. Berliner relied upon the independent appraisals conducted by American Appraisal Associates and internal investigation conducted by NorthWestern's Board. See, e.g., Berliner Report 1-1, 2-4, 2-5, 2-10 ­ 2-18, Beatty Aff. Exh. 37. 72. Neither of Plaintiff's experts considered or formed opinions as to whether Mr.

Hanson or Mr. Kindt violated any Generally Accepted Accounting Principles ("GAAP"), failed to timely recognize goodwill impairments, were involved in any alleged failure to provide adequate consideration regarding the Transaction, or breached any fiduciary duties to anyone. See Berliner Depo., p. 147, ln. 9 ­ p. 150, ln. 9, Beatty Aff. Exh.41; see Marcus Depo., p. 163, ln. 14 ­ p. 168, ln. 19, Beatty Aff. Exh.42. 73. NorthWestern's "Senior Management," as used in Mr. Berliner's Expert Report,

refers to Kipp Orme, Merle Lewis, Richard Hylland, and Kendall Kliewer. According to Mr. Berliner, Plaintiff's expert, these four individuals were responsible for NorthWestern's alleged failure to comply with SEC disclosure requirements, the knowing dissemination of materially false and misleading information to the public, failure to timely recognize goodwill impairment losses and NorthWestern's alleged GAAP violations. Neither Mr. Hanson nor Mr. Kindt are 17

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included in Mr. Berliner's references to NorthWestern's "Senior Management." See Berliner Depo., p. 156, ln. 6 ­ 159, ln. 9, Beatty Aff. Exh. 41. 74. The Berliner Report discusses various deficient disclosures and accounting

inaccuracies by NorthWestern and "NorthWestern's Management," but contains no reference to Mr. Hanson or Mr. Kindt and provides no basis for including Mr. Hanson or Mr. Kindt as part of "NorthWestern's Management." The only reference to either Mr. Hanson or Mr. Kindt in the Berliner Report is a single mention of Hanson in regards to a January 28, 2002 memorandum he co-authored. See Berliner Report, pp. 1-4 ­ 1-6, 1-8 ­ 1-9, 1-12 ­ 1-13, 2-5 ­ 2-22, 3-3 ­ 3-10, 5-1, Beatty Aff. Exh. 41. 75. Prior to completing his expert report, Plaintiff's expert, Paul Marcus, was

unaware his report would be used in connection with Magten's case against Mr. Hanson and Mr. Kindt. Mr. Marcus did not review the Complaint against Mr. Hanson and Mr. Kindt, nor did Mr. Marcus have a general understanding of the allegations made in that Complaint. See Marcus Depo., p. 155, ln. 16 ­ p. 156, ln. 10, Beatty Aff. Exh. 42. 76. The Marcus Report makes no mention of Mr. Kindt and contains only two

references to Mr. Hanson. Specifically, the Marcus Report states: 121. Regarding the transfer, Michael Hanson, president and CEO of NorthWestern Energy in 2002, stated that in executing the officer's certificate in connection with the transfer of the assets, he relied on NorthWestern's false and misleading financial statements. ... 125. Additionally supporting my belief is the fact that the negative consequences to Montana Power as a result of the acquisition by NorthWestern stand in stark contrast to the assurances provided to the MPSC by Michael Hanson prior to the acquisition. When asked to "address financial capability under two aspects: financial strength and financial flexibility", Mr. Hanson stated that: In general, we believe that capital will be no more expensive with NorthWestern as owner of MPC than is the case today. As I indicated, NorthWestern has enjoyed consistent access to capital on reasonable terms. While our corporate structure may seem complex on first examination, it assures separation of the utility 18

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related financings from other activities, and it should not create any new or additional concerns for this Commission because MPC has itself had significant non-utility operations. See Marcus Report, pp. 47, 49, Beatty Aff. Exh. 38. 77. Mr. Berliner opined in his Expert Report that had a goodwill impairment analysis

been done as of June 30, 2002, NorthWestern would have known that it violated certain debt covenants. See Berliner Report, pp. 4-1 ­ 4-2, Beatty Aff. Exh. 37. Defendants' expert Stephen Scherf concluded that after reviewing the spreadsheets and other financial documents contained in the Berliner Report, the very financial information relied upon by Mr. Berliner demonstrates NorthWestern was solvent on November 15, 2002. Mr. Scherf further concluded: "We are not aware of any analysis that has concluded that NorthWestern was insolvent or even in the `zone of insolvency' as of November 15, 2002." See Scherf Report, p. 12. STANDARD Federal Rule of Civil Procedure 56(c) provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Where, as here, the nonmoving party bears the burden of proof at trial, the moving party is entitled to summary judgment by demonstrating that the non-moving party cannot establish the existence of any element of the non-moving party's claim. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) ("The plain language of Fed. R. Civ. P. 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element on which that party will bear the burden of proof at trial."). In Celotex, the Supreme Court explained: In such a situation, there can be no `genuine issue as to any material fact,' since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial. The moving party is entitled to `judgment as a matter of law' because the nonmoving party has failed 19

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to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof. 477 U.S. at 323 (emphasis added). The moving party in such a case is not required to offer evidence negating any element of the nonmoving party's claim. Id. at 323. Rather, the burden on the moving party may be discharged by "pointing out to the district court that there is an absence of evidence to support the nonmoving party's case." Id. at 325. Here, Plaintiff Magten bears the burden of proof at trial as to its claims. ARGUMENT I. MAGTEN LACKS STANDING TO SUE HANSON AND KINDT. It has long been settled that a plaintiff may not avail itself of the federal courts unless an actual case or controversy exists and it has standing to bring the lawsuit. The "gist of the question of standing" is "[h]ave the appellants alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues." Baker v. Carr, 369 U.S. 186, 204 (1962). The United States Supreme Court has held: The rules of standing, whether as aspects of the Art. III case-or-controversy requirement or as reflections of prudential considerations defining and limiting the role of the courts, are threshold determinants of the propriety of judicial intervention. It is the responsibility of the complainant clearly to allege facts demonstrating that he is a proper party to invoke judicial resolution of the dispute and the exercise of the court's remedial powers. Warth v. Seldin, 422 U.S. 490, 517-18 (1975). The Third Circuit has provided a roadmap for standing determinations, instructing: Standing is a threshold jurisdictional requirement, derived from the "case or controversy" language of Article III of the Constitution. See Valley Forge Christian College v. Americans United for Separation of Church and State, 454 U.S. 471-73, 102 S. Ct. 752, 757-59, 70 L.Ed.2d 700 (1982). Plaintiffs must have standing at all stages of the litigation, see National Organization for Women, Inc. v. Scheidler, 510 U.S. 249, 114 S.Ct. 798, 127 L.Ed.2d 99 (1994), and they bear the burden of proving it "with the manner and degree of evidence required at the successive stages of the litigation." Lujan, 504 U.S. at 561, 112 S.Ct. at 2136. In addition, federal appellate courts have a bedrock obligation to examine both their own subject matter jurisdiction and that of the district courts. See FW/PBS Inc. v. City of Dallas, 493 U.S. 215, 230-231, 110 S.Ct. 596, 607, 107 L.Ed.2d 603 (1990. See also Chabal v. Reagan, 822 F.2d 349, 355 (3d Cir. 1987) (speaking of 20

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"overarching principle that requires us continually to inquire into our own jurisdiction"). Public Interest Research Group of New Jersey, Inc. v. Magnesium Elektron, Inc. (PIRG v. MEIC), 123 F.3d 111, 117 (3d Cir. 1997). The PIRG court also noted: "Like any jurisdictional requirement, standing cannot be waived. Therefore, throughout the entire litigation, it remained PIRG's responsibility to demonstrate that it has standing to pursue this case." Id. (emphasis added). Therefore, without the requisite standing, the case is barred. Standing is a threshold judicial determination that must be made to ensure the propriety of judicial intervention. Moreover, "[t]he question of standing is generally determined from the face of the complaint." Borelli v. City of Reading, 532 F.2d 950, 951 (3d Cir. 1976) (citing Schiaffo v. Helstoski, 492 F.2d 413, 423 (3d Cir. 1974). It is the claimant's burden to allege facts sufficient in its complaint to demonstrate it is a proper party entitled to judicial resolution of the dispute. Given, the totality of the allegations set forth in Magten's Complaint against Hanson and Kindt, it is clear that Magten lacks standing and its case is barred and must be dismissed. A. Magten's Allegations of Breaches of Fiduciary Duty are Derivative Claims.

As noted previously, the core allegation in the Complaint is that Hanson and Kindt, as officers of Clark Fork, assisted NorthWestern in what Magten characterizes as a fraudulent conveyance of assets from a wholly owned subsidiary to the parent company. In its Complaint, Magten asserts that it is a creditor of Clark Fork (Compl. ¶ 1); that Clark Fork was in the zone of insolvency prior to the Transaction (Compl. ¶ 47); that the transaction rendered Clark Fork insolvent (Compl. ¶ 1, 33, 35, 47); that the officers of Clark Fork owed fiduciary duties to the Clark Fork creditors (Compl. ¶ 1, 47); and that Hanson and Kindt breached those fiduciary duties when they assisted Clark Fork in transferring those assets to NorthWestern without receiving adequate consideration and assigned QUIPS obligations to NorthWestern when they knew NorthWestern (i) was insolvent, (ii) would remain insolvent, and (iii) would be unable to perform the QUIPS obligations (Compl. ¶ 50, 51). All of these allegations, if any are

cognizable, are derivative claims belonging only to Clark Fork.

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Whether a plaintiff's claims are direct or derivative is a question of state law; and the Court must look to the law of the state of incorporation. See, Karmen v. Kemper Fin. Servs. Inc., 500 U.S. 90, 108-109, 111 S. Ct. 1711, 114 L.Ed.2d 152 (1991); see also, Franklin Mutual Funds Fee Litigation, 388 F.Supp.2d 451, 462 (D. N.J. 2005). While the Montana Supreme Court has not had the opportunity to provide a definitive definition of what constitutes a direct versus a derivative claim, in 1987 the Ninth Circuit, interpreting a Montana question, provided the answer. In Sax v. World Wide Press, Inc., the Ninth Circuit held: Under Montana law, a shareholder can enforce a corporate right in a derivative action if certain conditions are met. Mont.R.Civ.P. 23.1: see S-W Co. v. John Wight, Inc., 179 Mont. 392, 402-03, 587 P.2d 3.48, 354 (1978). As a general rule, an action enforces a corporate right "if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders." 12B W, Fletcher, Cyclopedia of the Law of Private Corporations. § 5911 (rev. perm. Ed. 1984) (footnotes omitted); see Annotation Stockholder's Right to Maintain (Personal) Action Against Third Person as Affected by Corporations' Right of Action for the Same Wrong, 167 A.L.R. 279, 280 (1947) (cited by Mont.R.Civ.P. 23.1 comment). *614 Therefore, if the corporate wrong decreases the value of the corporation's stock, it does not necessarily create a direct cause of action for shareholders. Lewis, 719 F.2d at 1049 (applying Oregon law); W. Fletcher, supra, § 5913; Annot., 167 A.L.R. 279, 280 (1947). The general rule that a shareholder cannot enforce corporate rights in a direct action applies to actions arising out of either contract or tort law. Schaffer v. Universal Rundle Corp., 397 F.2d 893, 896 (5th Cir. 1968 (application Texas law). A direct action can be brought either when there is a special duty, such as a contractual duty, between the wrongdoer and the shareholder, or when the shareholder suffers injury separate and distinct from that suffered by other shareholders. W. Fletcher, supra, §5911; see Schaffer, 397 F.2d at 896. Sax v. World Wide Press, Inc., 809 F.2d 610, 613-614 (9th Cir.1987) (emphasis added). The treatise cited with approval by the Ninth Circuit goes on to note that waste and mismanagement of corporate assets, issuing stock for inadequate consideration, depreciation in the value of the stock and violation of federal securities laws are all examples of derivative claims because they affect the entire corporation, not just a few share