Free Response in Opposition to Motion - District Court of Arizona - Arizona

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Guttilla & Murphy, PC Firm No. 00133300 Ryan W. Anderson (No. 020974) 4150 West Northern Ave. Phoenix, Arizona 85051 (623) 937-2795 [email protected]

Attorneys for the Receiver UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA LAWRENCE J. WARFIELD, RECEIVER, Plaintiff, v. MICHAEL ALANIZ, ET AL. Defendants. Cause No. CV 03-2390 PHX JAT ) ) PLAINTIFF'S RESPONSE TO ) ) RADA DEFENDANTS' MOTION TO AMEND JURY INSTRUCTIONS ) PURSUANT TO FRCP 51 ) ) ) (Assigned to the Hon. James A. Teilborg)

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Plaintiff Lawrence J. Warfield, as court-appointed receiver, responds to the Rada Defendants' Motion to Amend Jury Instructions Pursuant to FRCP 51 ("Motion to Amend Instructions") and requests that the motion be denied. I. SUMMARY The Motion to Amend Instructions, which seeks to amend the Joint Proposed Jury Instructions, should be denied because it is untimely. Even if the motion was timely, the objections and proposed alternative instructions contained in the motion should be denied because such objections and instructions are themselves objectionable. Additionally, the Rada Defendants have no good cause to amend the instructions. For these reasons, the Receiver requests the Court enter an order denying all relief sought in the motion.

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II. THERE IS NO GOOD CAUSE TO GRANT LEAVE TO AMEND THE JOINT PROPOSED JURY INSTRUCTIONS This Court has authority to establish a deadline for submitting jury instructions

4 and objections to instructions submitted by the opposing party. FED. R. CIV. P. 51(a)(1). 5 In its Order Setting Final Pretrial Conference, dated August 7, 2006, this Court 6 established a deadline of October 2, 2006 for the parties to submit a joint pleading 7 proposing jury instructions. 8 When the deadline set by a pretrial scheduling order has passed, leave to amend is 9
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granted only when there is "good cause." Helus v. Equitable Life Assurance Soc'y of the
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10 U.S., 309 F.Supp.2d 1170, 1175 (N.D.Cal. 2004) (citing FED. R. CIV. P. 16(b)). The 11 "good cause" inquiry "primarily considers the diligence of the party seeking the 12 amendment," but "the existence or degree of prejudice to the party opposing the 13 modification" may also be considered. Helus v. Equitable Life Assurance Soc'y of the 14 U.S., 309 F.Supp.2d 1170, 1175 (N.D.Cal. 2004) (quotation omitted). Even when such a 15 showing is made, the district court may exercise its discretion to refuse to allow the 16 amendment. See, e.g., Bradford v. DANA Corp., 249 F.3d 807, 809 (8th Cir. 2001). 17 Here, there is no basis for granting leave to amend the Joint Proposed Jury 18 Instructions. The Rada Defendants fail to even argue that there is good cause to grant 19 leave to amend. Instead, they merely assert objections to jury instructions, many of 20 which they previously stipulated to. The objections are baseless and predicated on 21 misstatements of this Court's findings and the law. The Rada Defendants also propose 22 alternative instructions that are objectionable. Finally, the Motion to Amend Instructions 23
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is not a response to any new argument propounded by the Receiver or new information presented in this case, but, rather, appears to be based on nothing more than an apparent dissatisfaction with their previously-submitted instructions and objections. Accordingly, the Rada Defendants have failed to show good cause exists for extending the deadlines contained in the Order Setting Final Pretrial Conference and amending the Joint Proposed Jury Instructions. III. THE MOTION TO AMEND INSTRUCTIONS SHOULD BE DENIED BECAUSE IT IS UNTIMELY, PROPOSES USE OF MISLEADING TERMS, IMPROPERLY SEEKS A DISPOSITIVE DETERMINATION, ASSERTS MERITLESS OBJECTIONS AND PROPOSES OBJECTIONABLE ALTERNATIVES. A. Rada Defendants' Motion to Amend Instructions should be denied because it is untimely. The Motion to Amend Instructions should be denied because it was filed after the deadline for filing such a motion. The Rada Defendants had ample opportunity to prepare and propose both jury instructions of its own and objections to the instructions of the Receiver by the deadline established by this Court and they present no justification for amending such instructions and objections at this late date. Moreover, the motion is not in response to any new argument propounded by the Receiver or new information presented in this case. Based on nothing more than an apparent dissatisfaction with their previously-submitted instructions and objections, the Rada Defendants seek to amend such instructions and objections. Accordingly, the Motion to Amend Instructions should be denied.

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B.

The proposed use of the global term "Rada Defendants" in jury instructions should be denied because the term is misleading and contradicts another stipulated instruction. The Rada Defendants object to the term "defendant" in several instructions,

including instructions to which they previously stipulated to the use of the term "defendant". The Rada Defendants would replace the word "defendant" with the global term "Rada Defendants." The use of the global term "Rada Defendants" is objectionable because it is misleading. The term appears to require the Receiver to prove the elements of his claims against all of the Rada Defendants to obtain relief from any of the Rada Defendants. The term also obfuscates each Rada Defendant's obligation to establish his own defenses. Additionally, the proposal contradicts the stipulated FMCJI 3.11, which instructs the jury to "decide the case as to each defendant separately." Therefore, the proposal to eliminate the term "defendant" should be denied.

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Defendants' limitations objection should be denied because it is improperly raised, untimely, and without merit. The Defendants object to several jury instructions, including instructions to which

they had previously stipulated, arguing that the Receiver's claims for federal securities law violations are barred because "the statute of limitations has expired on every claim that was made against any Rada Defendant pursuant to § 10(b) of the '34 Act and under Rule 10b-5 (17 C.F.R. § 240.10b-5)." The Court should deny the Defendants' limitations objections because the objections, themselves, are untimely for reasons stated in III.A., above, because the objections are an improper attempt to assert an unsupported and untimely dispositive motion, and because the objections are without merit.

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An objection to a jury instruction is an improper vehicle for making a dispositive motion. The objection demands a dispositive determination by seeking to have all references to the Receiver's securities law claims removed from the instructions. The deadline for filing and response to dispositive motions has expired, and the Rada Defendants have not requested, much less received, leave to file a dispositive motion. The limitations objection is unsupported by application of law to facts. The Rada Defendants merely quote two sentences from a court holding and fail to apply such law to the facts at issue herein. Actually, the Rada Defendants wholly fail to present any evidence in support of its assertion that the Receiver's federal securities claims are barred by statutes of limitations. The Rada Defendants' limitations objections are without merit because, not all of the Receiver's claims for violations of securities law fall outside the statutory period. The Rada Defendants object to instructions on or related to claims for violations of securities law, arguing these claims are barred by a one-year statute of limitations and a three-year statute of repose. The Rada Defendants argue that all of the Receiver's claims are barred, but do not contest the receipt of Ponzi payments by certain defendants within three years of the date the Receiver filed this lawsuit, See Joint Proposed Final Pretrial Order, § C, ¶¶ 26, 43. Additionally, the Rada Defendants present no evidence suggesting the Receiver should have discovered the fraudulent nature of the Ponzi payments more than a year prior to filing this lawsuit. The Rada Defendants simply have not presented an adequate argument supported by facts for barring all of the Receiver's federal securities claims. Therefore, the Receiver is entitled to jury instructions on his federal securities law claims and the Rada Defendants' limitations objections should be denied.
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Moreover, the Rada Defendants' limitations objections do not bar the Receiver's other claims which have as an element the illegal sale of securities and the receipt of Ponzi payments. For example, violations of federal securities laws are material to the Receiver's equitable disgorgement claims. Therefore, the Receiver should be permitted to give instructions on such violations.

Rada Defendants' specific objections and proposed alternate instructions should be denied because they, themselves, are objectionable. The Rada Defendants raise objections to specific instructions contained in the

Joint Proposed Jury Instructions and propose alternative wording for the instructions objected to. For the reasons stated in § III. A, above, each objection should be denied as untimely. The Receiver's responses to the Rada Defendants' specific objections and to their proposed alternative instructions are provided below. 1. FMCJI 1.2--Claims and Defenses a. Rada Defendants' objections to FMCJI 1.2 should be denied because they are improperly raised, untimely and without merit.

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The Rada Defendants' argue that the recital of the Receiver's claims contained in 16 FMCJI 1.2 should not include the Receiver's claims for federal and state securities law 17 violations because "the statute of limitations has expired on every claim that was made 18 against any Rada Defendant pursuant to § 10(b) of the '34 Act and under Rule 10b-5 (17 19 C.F.R. § 240.10b-5)" and because such inclusion "permit[s] the jury to speculate about 20 the '33 Securities Act or '34 Exchange Act... contra to the holding of Mochler v. 21 Multnomah." The limitations objection should be denied because it improperly seeks a 22 dispositive ruling, is untimely and is without merit, as detailed in § III.C., above. Also, 23
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this instruction does not run contra to the holding in Mochler v. Multnomah, which does not address a jury instruction that permits speculation of allegedly barred claims, but instead, addresses a jury instruction that erroneously states the burden of proof in an employment discrimination suit and holds that such instruction was harmless. See 140 F.3d 808, 814-15 (9th Cir. 1998). Accordingly, the Rada Defendants' objections to the previously stipulated FMCJI 2.1 should be denied. b. Rada Defendants' proposed alternate instruction to FMCJI 1.2 should be denied because it addresses wholly other issues, employs a misleading term, and misstates the Court's previous rulings.

The Rada Defendants' proposed alternate instruction addresses issues wholly
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10 unrelated to those addressed in the previously stipulated FMCJI 1.2, and, so, is not an 11 "alternative" instruction. The proposal amounts to an all new instruction. For this reason, 12 alone, the proposed alternative should be denied. Additionally, the proposal refers to the 13 Rada Defendants en masse, which is objectionable for the reasons stated in § III.B., 14 above. Finally, the proposal states "the Court has already ruled that [the Receiver's 15 securities law claims] are barred by law," which is incorrect. The Rada Defendants 16 disingenuously argue that "the Court has already ruled that [the Receiver's claims for 17 federal and state securities violations] are barred by law." At no time has this Court even 18 addressed statutes of limitations and repose applicable to the Receiver's federal securities 19 law claims. With regard to the Receiver's claims for state securities law violations, this 20 Court held that "the Plaintiff cannot base its [A.R.S. §§ 44-1004(A)(2) and 44-1005] 21 claims on fraudulent transfers that took place prior to December 3, 1999," leaving all 22 claims for transfers occurring after that date in tact. Amended Order Supercedes [sic] 23
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August 1, 2006, Order ("Amended Order"), § II.C.1. This Court further held that "the Plaintiff can base its claims under § 44-1004(A)(1) on allegedly fraudulent transfers that took place prior to December 3, 1999, unless this action was filed more than one year after the allegedly fraudulent nature of the transfers should reasonably have been discovered." Amended Order, § II.C.1 (emphasis in original). For these reasons, the Rada Defendants' proposed alternate instruction should be denied. 2. FMCJI 21.3--Securities-Scienter-Knowledge-Definition (15 U.S.C. § 78(j)(b)) a. Rada Defendants' objections to FMCJI 21.3 should be denied because they improperly seek a dispositive ruling, and are untimely, without merit, and contrary to this Court's previous rulings.

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The Rada Defendants object to the use of the word "securities" in the previouslystipulated instruction, arguing the word is inappropriate because "the statute of limitations has expired on every claim that was made against any Rada Defendant pursuant to § 10(b) of the '34 Act and under Rule 10b-5 (17 C.F.R. § 240.10b-5)," and the word is a "misnomer." The limitations objection should be denied because it improperly seeks a dispositive ruling, is untimely and is without merit, as detailed in § III.C., above. The misnomer objection should be denied because it is based on the faulty predicate that the charitable gift annuities sold by the Rada Defendants are not securities. This Court has ruled that such annuities are, indeed, securities. See Amended Order, § II.A.1. (finding "the CGAs at issue in this case are securities not subject to any exemptions"). For these reasons, the objections to the previously stipulated FMCJI 21.3 should be denied.

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b.

Rada Defendants' proposed alternate instruction to FMCJI 21.3 should be denied because it is misleading.

Despite their objections, the only change the Rada Defendants' propose to the 3 previously stipulated instruction is the deletion of the word "Securities" from the title of 4 the instruction. The presence of the word in the title of this model instruction on scienter 5 indicates that the instruction is limited to violations of securities law. The removal of the 6 word from the title might mislead the jurors to believe the instruction applies to every 7 claim brought by the Receiver. Therefore, proposal should be denied. 8 3. 9
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Non-Model Stipulated Instruction No. 3--Constructive Fraud a. Rada Defendants objections to Non-Model Stipulated Instruction No. 3 should be denied because the objection improperly seeks a dispositive ruling, are untimely and without merit.

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The Rada Defendants object to the previously-stipulated Non-Model Stipulated Instruction No. 3, arguing that references to federal securities laws should be stricken because the Receiver's securities law claims are barred by limitations. The Rada Defendants' limitations objection should be denied because it improperly seeks a dispositive ruling, is untimely and is without merit, as detailed in § III.C., above. b. Rada Defendants' proposed alternate instruction is objectionable because it is misleading and misstates the law.

The Rada Defendants' proposed alternate instruction should be denied because it 19 is misleading and misstates the law. The use of the term "Rada Defendants" is 20 objectionable because it is misleading, as detailed in § III.B., above. Also, the proposal 21 attempts to narrowly limit the Receiver's constructive fraud claims to those based on one 22 particular type of fiduciary duty violation, where constructive fraud may arise from 23
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various breaches of duty. See Taeger v. Catholic Family and Community Services, 995 P.2d 721, 725 (Ariz. App. 1999)(defining constructive fraud as "a breach of a legal or equitable duty which, without regard to moral guilt or intent of the person charged, the law declares fraudulent because the breach tends to deceive others, violates public or private confidences, or injures public interests")(internal citations omitted)(emphasis added), and see Mageary v. Hoyt, 369 P.2d 662 (1962)(addressing constructive fraud based on breach of professional duty to exercise that reasonable skill and knowledge ordinarily possessed and exercised by attorneys). See also In re Estate of Agans, 998 P.2d 449, 450 (Ariz. App. 1999) (addressing constructive fraud in context of community rights to life insurance proceeds); Cochise County v. Southern Pac. Co., 401 P.2d 153, 156-57 (Ariz. App. 1965)(addressing constructive fraud in context of tax assessment). Because the proposed alternative instruction is misleading and misstates the law, it should be denied. 4. FMCJI 21.1 Securities--Misrepresentation--Elements and Burden of Proof (15 U.S.C. § 78(j)(b)) a. Rada Defendants' objections to FMCJI 21.1 should be denied because they lack legal foundation, improperly seek a dispositive ruling, and are untimely and without merit.

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The Rada Defendants object that "[p]roof of scienter is required in a claim for 18 violation of § 10(b)" and that "the statute of limitations has expired on every claim... 19 pursuant to §10(b)." The obtuse scienter objection apparently argues that the instruction 20 improperly states the scienter element of the claim. To cure the problem, the Rada 21 Defendants would add to the model instruction the words "with intent to defraud." This 22 phrase misstates the law on the issue. "Congress intended the ambit of § 10(b) to reach a 23
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broad category of behavior, including knowing or reckless conduct." Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir. 1978)(emphasis added). Further, the Rada Defendants' scienter objection contradicts the "knowing and reckless" definition of scienter in FMCJI 21.3, to which definition the Rada Defendants do not object. Further, the limitations objection should be denied because it improperly seeks a dispositive ruling, is untimely and is without merit, as detailed in § III.C, above. Therefore, the Rada Defendants' objections to the previously stipulated FMCJI 21.1 should be denied. b. Rada Defendants' proposed alternate instruction to FMCJI 21.3 should be denied because the proposal is misleading and misstates the law.

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The Rada Defendants propose an alternative instruction based on the model instruction, but modified in three general ways: (1) the term "Rada Defendants" replaces "defendant;" (2) the phrase "with the intent to defraud" is added to the requirement that the defendant acted knowingly; and (3) a statement is appended to the end of the instruction that states, generally, this Court has ruled that the Receiver's federal securities law claims are barred. The limitations objection should be denied because it improperly seeks a dispositive ruling, is untimely and is without merit, as detailed in § III.C., above. The use of the term "Rada Defendants" is objectionable because it is misleading as stated in § III.B., above. Finally, the claim that "Receiver's claims for violations of federal securities law have been found by this court to be barred by law..." is incorrect in that this Court has not found such claims to be barred. For these reasons, the proposed alternate instruction should be denied.

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5.

Non-Model Stipulated Instruction No. 7--Arizona Securities Law-- Knowledge

The Rada Defendants object to the previously-stipulated instruction, proposing, 3 among other insignificant changes, the following: (a) the use of the term "Rada 4 Defendant" or "Rada Defendants" instead of the general term "defendant;" (b) the 5 addition of the phrase "to prove a securities violation under Arizona law;" and (c) the 6 addition of the phrase "to the reasonable buyer of a charitable gift annuity." The use of 7 the term "Rada Defendants" should be denied because it is misleading, as stated in § 8 III.B., above. The phrase "to prove a securities violation under Arizona law" is 9
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unnecessary because the title of the instruction clearly indicates that the instruction
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10 regards the Receiver's state securities law claim. The phrase "to the reasonable buyer of 11 a charitable gift annuity" is likewise unnecessary. Therefore, the Rada Defendants' 12 objections and proposed alternate instruction should be denied. 13 6. 14 The Rada Defendants' response to this instruction is confusing, but appears to 15 merely revise the wording of their objection to this instruction presented in the Joint 16 Proposed Jury Instructions, which objection, itself, is confusing because the law and 17 cases cited by the Rada Defendants' do not appear to contradict the instruction. 18 Accordingly, any objection to this instruction should be denied. The Rada Defendants do 19 not propose an alternate instruction. 20 21 22 23
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Plaintiff's Jury Instruction No. 2--Breach of Fiduciary Duty

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7.

Plaintiff's Jury Instruction No. 3--Federal Securities Law--General a. Rada Defendants' objections to Plaintiff's Jury Instruction No. 3 should be denied because they are based on an erroneous interpretation of the law.

The Rada Defendants object to the Plaintiff's Jury Instruction No. 3, which is modeled after FMCJI 21.0, because the instruction does not require that misrepresentations or omissions be intentional. In support for their objection, the Rada Defendants cite Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir. 1978). On the very page cited by the Rada Defendants, the Nelson court states: "Congress intended the ambit of § 10(b) to reach a broad category of behavior, including knowing or reckless conduct." (Emphasis added). Further, the Rada Defendants' scienter objection contradicts the "knowing and reckless" definition of scienter in FMCJI 21.3, to which definition the Rada Defendants do not object. For these reasons, the Rada Defendants' objections mistake the law. Therefore, the objection should be denied. b. Rada Defendants' proposed alternate instruction to Plaintiff's Jury Instruction No. 3 should be denied because it is misleading and misstates the law.

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The Rada Defendants propose inserting language limiting the communications prohibited by federal securities law to intentional misrepresentations and omissions. Because the law provides for reckless communications, as detailed immediately above, this proposal is misleading and misstates the law and, therefore, should be denied.

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8.

Plaintiff's Jury Instruction No. 6--UFTA--Constructive Fraud-- Defenses--Good Faith a. Rada Defendants' objections to Plaintiff's Jury Instruction No. 6 should be denied because they run contrary to case law and this Court's findings.

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The Rada Defendants object to Plaintiff's Jury Instruction No. 6 because: (1) it is 5 argumentative; (2) "No court has held that the `good faith' defense is unavailable where a 6 federal or state securities law has been violated," (emphasis added); and (3) the "CGA's 7 were not subject to Arizona securities laws at the time sold." The instruction is 8 informative, and not argumentative, by providing law on the good faith defense. The 9
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Arizona Supreme Court noted, "No proof of intent is required to maintain a fraudulent
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10 transfer action under A.R.S. section 44-1005. Nor is a good faith defense available to a 11 debtor in a fraudulent transfer action brought under this section." Hullett v. Cousin, 63 12 P.3d 1029, 1032 (Ariz. 2003) (internal quotation omitted). See A.R.S. § 44-1008(A); In 13 re Viscount Air Servs., Inc., 232 B.R. 416, 445 (Bankr.D.Ariz. 1998) (finding good faith 14 defense inapplicable to A.R.S. section 44-1005). Finally, the assertion that the CGAs 15 were not subject to securities laws is not only baseless, but contradictory to this Court's 16 previous holdings. Accordingly, the Rada Defendants' objection is baseless and should 17 be denied. 18 19 20 21 22 23
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b.

Rada Defendants' proposed alternate instruction to Plaintiff's Jury Instruction No. 6 should be denied because it is misleading and misstates the law.

The Rada Defendants proposal to Plaintiff's Jury Instruction No. 6 is misleading in the use of the global term "Rada Defendants," as detailed in § III.B, above, and misstates the law in its description of the good faith defense for the reasons stated immediately above. Therefore the proposal should be denied. E. Response to specific New Instructions proposed by Rada Defendants. The Rada Defendants propose four additional jury instructions regarding contributory negligence and comparative fault. The Receiver objects to each instruction as untimely for the reasons stated in § III.A., above. The Receiver objects to the use of the term "Rada Defendants" in each instruction as misleading for the reasons stated in § III.B., above. The Receiver further objects to the instructions because the instructions are based on the Arizona's Uniform Contribution Among Tortfeasors Act, which applies only to tort claims, but nothing in the instructions so limit their application. See A.R.S. §§ 12-2501 to 12-2509. The instructions, therefore, are misleading and misstate the law to the extent that they purport to apply to all of the Receiver's other claims. Additionally, the Receiver objects to the proposed new "Rada Defendant's Jury Instruction--Statement of Claims," in particular, because it misstates the Receiver's claims (the Receiver does not claim "that each purchaser of a CGA was also at fault for failure to properly investigate the safety of buying a CGA from Mid-America"). For these reasons, the Rada Defendants' new proposed instructions should be denied.

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IV. Prayer For the reasons stated above, the Receiver requests this Court enter an order denying all relief requested in the Rada Defendants' Motion to Amend Jury Instructions Pursuant to FRCP 51 and granting the Receiver such other relief as to which he may show himself entitled. Respectfully submitted November 8, 2006. GUTTILLA & MURPHY, PC

s/Ryan W. Anderson Ryan W. Anderson Attorneys for the Receiver PROOF OF SERVICE

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This is to certify that on November 8, 2006, I electronically transmitted the foregoing document to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the CM/ECF registrants listed below; and that the persons listed below who are not registered participants of the CM/ECF System have been served with a copy of the foregoing document by first class mail this date. s/Ryan W. Anderson Ryan W. Anderson Burton M. Bentley, Esq. ECF Registered [email protected] Attorney for Defendants Leonard and Elizabeth Bestgen, Robert Carroll,Rudy and Mary Crosswell, Charles Davis, Richard Derk, Orville Frazier, Ronald Kerher, Dwight Lankford, John and Candes Rada, Paul Richards, and Patrick and Andrea Wehrly Gregory Shebest, Esq. ECF Registered [email protected] Attorney for Heritage Marketing

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David L. Kagel, Esq. ECF Registered [email protected] Attorneys for Paul Pichie Steve A. Bryant, Esq. Steve Bryant & Associates 3618 Mt. Vernon Street, Suite A Houston, TX 77006 Attorneys for Dwight Lankford Robert Tretiak 4615 N. Ft. Apache Road Las Vegas, NV 89129 Defendant Pro Se Ren Bidwell 3430 Pacific Ave SE Olympia, WA 98501 Defendant Pro Se

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